LIBOR Transition: Expert Views – Philip Whitehurst

“Our participants now know what happens if they do nothing. We hope this spurs them to consider more proactive transition activities.”

Philip Whitehurst

LCH was the first CCP to consult the market on proposals to actively transition cleared LIBOR-based portfolios to market standard RFR-equivalents. Could you describe the proposal for conversion?

Great as the fallbacks are, we were concerned that they give rise to swaps where the label says one thing (“LIBOR”) but risks are to something else. To square this back up, our consultation proposed a compensated contractual conversion of LCH-cleared LIBOR swaps into corresponding Risk-Free Rate (RFR) equivalents shortly before the cessation effective date. We were pleased to get really strong engagement from our members and clients, and strong support for the approach.

The one thing we’ve modified relates to the spread adjustment that Bloomberg is producing: we are going to carry that as a non-compounded spread on the RFR leg of the converted contract. We’ve also confirmed recently that we plan to preserve the economic effect of any representative LIBORs between now and the end of the year. And confirmation that U.S. dollar LIBOR will continue to be published until June 2023 means we can defer the conversion process in that market, for now.

What does this mean for future clearing eligibility for sterling, Swiss franc, yen and euro-LIBOR-based derivatives?

Our plan is to tie the withdrawal of clearing eligibility to the conversion dates. These are set now, as the weekend of 18 December 2021 for sterling LIBOR contracts, and 4 December 2021 for yen, Swiss franc and euro LIBOR trades. In short, we don’t plan to clear swaps tied to these benchmarks beyond these dates. We’ve picked up on some concerns that this might create a challenge for swaption trades that physically settle into LCH-cleared swaps, so we are working on a potential solution for that – it’s something that will need sensitive handling to ensure it’s clear that no newly-traded LIBOR swaps would be eligible.

The U.S Federal Reserve has recently reiterated guidance to regulated firms to not enter into new LIBOR-based contracts after the end of 2021. What implications might this guidance have for central clearing?

This is an interesting and potentially-challenging area. The guidance is clear, and there are only very limited circumstances in which entering into new U.S. dollar LIBOR contracts are viewed as appropriate. However, noting that there are such circumstances and that clearing obligations may still apply, it could help to minimise systemic risk if central counterparties (CCPs) were to keep eligibility open for a period. We would need to monitor liquidity very closely, and we have a risk framework that can be adapted to these conditions.

“The guidance is clear, and there are only very limited circumstances in which entering into new U.S. dollar LIBOR contracts are viewed as appropriate.”

Philip Whitehurst

Could you talk about the trends in SOFR, SONIA, SARON and TONAR cleared volumes you have seen at LCH over the last 12 months?

Each market is individual, but it’s fair to say the trend is one of growth across the board. We’ve had two big events to spur Secured Overnight Financing Rate (SOFR) volumes: the first, the discounting transition, was specific to SOFR and arguably brought it into parity with other RFRs; and the second, which applies to all these benchmarks, was the UK FCA LIBOR announcement on 5 March 2021. This is likely to be a lift across the board, by infusing latent liquidity into RFR-based swaps in all LIBOR currencies.
Following the announcements on the end of LIBOR on 5 March 2021, firms now have certainty about the cessation dates of panel-bank LIBOR and the fixing of the ‘spread adjustments’ by the International Swaps and Derivatives Association (ISDA) creates a clear economic link between sterling LIBOR and SONIA, providing a firm basis for discussions about active transition.

As such, we would encourage firms to engage with their counterparties as soon as possible regarding active transition, given the limited time available until the end of 2021; and where active transition is not viable, firms will of course want to ensure that robust fallbacks are in place.

For support with these discussions, firms can refer to various informative documents produced by the RFRWG, available via the RFR transition pages on the Bank of England website.

What advice would you give to firms who are yet to start active portfolio transitions to RFRs?

One way to think about the conversion processes we have announced, which of course apply only to LCH-cleared swaps, is that they create a backstop or a baseline. Our participants now know what happens if they do nothing. We hope this spurs them to consider more proactive transition activities, by providing certainty of outcome if they are more passive.

What would you say is the biggest obstacle firms are facing as they prepare for the transition away from LIBOR?

We hear constantly about the sheer scale and complexity of the transition process. Against the backdrop, we hope that clarity about what will happen to their cleared swaps will help simplify at least one element of the transition.

Additional Resource

LIBOR Transition Solutions

As the move away from LIBOR continues, Bloomberg offers a comprehensive suite of data, analytics, and portfolio solutions to help market participants assess the impact of the transition to risk-free rates, providing transparency and support for all products across our platform.

LIBOR Transition Solutions

As the move away from LIBOR continues, Bloomberg offers a comprehensive suite of data, analytics, and portfolio solutions to help market participants assess the impact of the transition to risk-free rates, providing transparency and support for all products across our platform.