Preparing for transition from LIBOR to risk free rates
Global regulators are concerned about the robustness of benchmark interest rates such as LIBOR and expect market participants to plan for no LIBOR publication after the end of 2021.
Regulatory measures implemented after the 2007 - 2008 financial crisis to strengthen banks’ balance sheets have reduced the utility of unsecured interbank borrowing in the money markets. These are the same transactions upon which LIBOR submissions are based.
In July 2014 the Financial Stability Board, an international body tasked with promoting financial stability, issued a report expressing concerns about the reliability and robustness of existing interbank benchmark rates.
As directed by this report, LIBOR has been reformed, but financial stability concerns remain as the number of underlying transactions has not materially changed. New, alternative risk free rates have been developed by central bank led working groups. These rates are based on larger numbers of transactions.
Global regulators are stressing the need for market participants to transition away from LIBOR to these new rates by the end of 2021, as LIBOR may no longer be available after this time.
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