Post Libor World – Impact on Buyers Credit

In earlier article we have discussed about various aspect of Libor and its Impact on buyers credit transaction.

In brief, Libor attempts to answer a fundamental question: What is the  cost of money? It does this for a range of currencies (dollars, euros,  pounds, etc.) and for a range of maturities.

Since 2011 when news of Libor scandal had appeared, there has been many changes in Libor. Taking this further on 27th July 2017 current FCA Chief Andrew Bairley announced further changes.

One of the major change was by End of 2021 FCA will stop regulating Libor. Thus there is a good possibility that  it may stop getting published after that. Above speech gives reason why this step was taken and how market should move on to alternative benchmark.

Alternative Benchmarks

Alternatives which may replace Libor are given below. Some of these them are new or proposed. Between now and 2021 regulators and banks will have to stream line these benchmarks.

  1. UK: SONIA. Latest Rates
  2. USA: Treasury Repo Rate (Yet to be published).
  3. Europe: EONIA
  4. Swiss: SARON
  5. Japan: TONAR

Impact of Buyers Credit Market

  1. New benchmark: In current scenario, buyers credit arranged from bank based in any country but quote is linked to Libor rates and thus easier to compare. In future, if so happens instead of Libor every country financial institutions starts using another benchmark, then importer will have to keep track of each benchmark to figure out which quote is cheaper.
  2. Financing Currency may also differ based on country from which financing is been taken.
  3. The market will need guidance as to what a replacement could be and this will lead to increased volatility and possibly reduced liquidity in the near term.

Conclusion

There are still if’s and buts on Libor existence post end of 2021. In the same speech door has been kept open.

An obvious question is what happens to LIBOR after end-2021.

The answer to the question would be up to the benchmark’s administrator – IBA – and the panel banks. They could of course continue to produce LIBOR on its current basis if they wanted to, and were able to do so. But, under this plan, the benchmark would no longer be sustained through the mechanism of the FCA persuading or obliging panel banks to stay. The survival of LIBOR on the current basis, as a dynamic benchmark based on daily submissions and updates, could not and would not be guaranteed.

One will have to keep a track on how overall market and buyers credit market adjust to this new possibility. My view is market will move to new benchmarks and it may be sooner than 2021

There are few articles listed below which would  help in throwing some more light into the subject as it is still a developing story.

Reference:

  1. Future of Libor : Speech by Andrew Bailey, Chief Executive of the FCA, at Bloomberg London : Dated: 27 July 2017
  2. The Death of Libor – A Bank Loan Perspective
  3. Libor Funeral Set for 2021 as FCA Abandons Scandal – Tarred Rate
  4. Monkeying with Libor
  5. New Treasuries ‘repo’ rate to replace Libor
  6. Alternative Reference Rate Committee: FAQ
  7. Reforming Major Interest Rate Benchmarks: Progress report on implementation of July 2014 FSB recommendations
  8. The Wheathley Review of Libor : Final Report : Dated 28-09-2012
  9. HM Treasury : The Wheatley Review
  10. Speech by Martin Wheatley – Managing Director, FSA, and CEO Designate, FCA at the Wheatley Review of LIBORDated 28-09-2012
  11. A Post Libor World: Impact and Analysis

Earlier Article of Libor:

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