Regulatory Insights
NWM: LIBOR - Back to the Future
2019-09-19T11:17:18

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.   

     

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Phil Lloyd, NWM Sales

Dave Halstead, NWM Trading  



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Authors
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Phil Lloyd
Head of Market Structure & Regulatory Customer Engagement
London
+44 20 7085 1271
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Dave Halstead
Trader GBP Swaps
London
+44 20 7085 3757

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