Regulatory Insights
NWM: LIBOR - Back to the Future

Does the past impact the future, Doc? 


Lots of excitement in GBP Basis this morning after ISDA finally launched the consultation into the fallback parameters – responses due 23 Oct, so expect results a few weeks later.


From the document the following options are primarily under consideration.  


  1. Median over five year lookback period from date of announcement / publication of information regarding cessation.
  2. Trimmed mean over ten year lookback period from date of announcement / publication of information regarding cessation.

The headline for this is clearly that FRA SONIA basis post cessation should be tighter than it is now, but whilst this provides clarity – there’s also further confusion around how you interpret the text “from date of announcement / publication of information regarding cessation”.


From the argument given by respondents who favoured 5yrs because 10yrs would capture the financial crisis, it seems people are thinking that this spread is going to be calculated in advance of cessation rather than post end of 2021 as one would expect. Surely the point of cessation is after 2021 when Banks are no longer compelled to contribute, cessation is announced, therefore >2021 – 10yrs = >2011.


Were these respondents interpreting this to mean the fallback spread would be calculated in advance of cessation occurring – at the point the fallback language is agreed? The trigger for LIBOR ending is something we've discussed before and with recent pre-cessation consultation preliminary results not helping it's a key topic to debate further. 


What if for some (admittedly unlikely) reason cessation didn’t occur for some years after the expected 2022 date – we’d use an average calculated over a period of 5yrs from now – that doesn’t seem like a very robust approach to take for the documentation, and with Bloomberg already announced as the calculation agent, we can be confident that they’ll be publishing an updated calculation of the spread daily using whatever the agreed methodology is as we approach a likely cessation date.


Currently, we still think this means when LIBOR actually ceases – not just when 'information around it ceasing at a future date' is published, ie this fixed basis spread will be calculated when LIBOR production ceases


As we’d anticipated, we’ve seen FRA SONIA basis moving tighter (2bps at the extremes of the morning) and 3s6s slightly wider.


No doubt there will be a sequel.   


Please click here to find all of NatWest Markets’ Strategy and Sales commentary/ideas. 


This is Non-Independent Research, as defined by the Financial Conduct Authority. This material should be regarded as a marketing communication and may have been produced in conjunction with the NatWest Markets Plc trading desks that trade as principal in the instruments mentioned herein. All data is accurate as of the report date, unless otherwise specified.


This communication has been prepared by NatWest Markets Plc, and should be regarded as a Marketing Communication, for which the relevant competent authority is the UK Financial Conduct Authority. Please follow the link for the following information   


Where communicated in Singapore, this communication may be deemed an advertisement. This advertisement has not been reviewed by the Monetary Authority of Singapore.  


  • MAR Disclaimer
  • Conflicts of Interest statement
  • Glossary of definitions
  • Historic Trade ideas log  

Phil Lloyd, NWM Sales

Dave Halstead, NWM Trading  

Note that the text above is subject to the disclaimer(s) accessible if you Click Here
Phil Lloyd
Head of Market Structure & Regulatory Customer Engagement
+44 20 7085 1271
Dave Halstead
Trader GBP Swaps
+44 20 7085 3757


"Related Articles" Coming Up Next..
  • 1. BoE Inflation Report - Reinforcing Policy Neutrality
  • 2. BoE Inflation Report - Reinforcing Policy Neutrality
  • 3. BoE Inflation Report - Reinforcing Policy Neutrality
  • 4. BoE Inflation Report - Reinforcing Policy Neutrality