Transitions away from Libor are showing progress, finds Bloomberg

New survey finds that over 50% of firms no longer trade USD Libor-indexed products, suggesting that the transition away from USD Libor is well underway.

According to a new survey from Bloomberg, financial services firms are on track for a successful transition following the cessation or non-representation designation of Sterling, Swiss and Japanese Yen Libors at the end of 2021.

The survey was conducted last month and polled 130 executives from financial services firms and corporations worldwide.

The survey found that more than 50% of firms no longer trade USD Libor-indexed products including floating-rate notes, cross-currency swaps and Eurodollar futures – suggesting that the transition away from USD Libor is well underway.

“The US dollar markets are the biggest financial markets in the world, and everyone will be impacted by the June 2023 deadline; whether you are a multi-national firm with exposure in many currencies or a smaller company that only focuses on dollar investments, you will be significantly impacted,” said Steffan Tsilimos, global head of interest rate derivatives products, speaking to The TRADE.

Transition decisions around instruments such as non-centrally cleared USD Libor derivatives and tough legacy contracts have been able to be made due to firms being given additional time because of the delayed cessation for key USD Libor tenors until June 2023.

In respect to how non-centrally cleared derivatives are handled, firms are split on strategy. 28% of firms said they were “not sure” how to address these derivatives before the cessation date, while an addition 13% said they were still formulating a transition strategy.

Elsewhere, 20% said they are planning a mixture of re-papering to RFR equivalents and ISDA fallbacks, while 11% said they plan to let these derivatives run to maturity via the ISDA fallbacks.

The survey also found that some challenges do exist, relating to operations, selection of alternative rates and re-papering of existing contracts – with 50% of respondents noting they are facing challenges related to systems and operational readiness.

This does, however, show progress in transition efforts compared to a previous survey by Bloomberg and the Professional Risk Managers’ International Association (PRIMIA) last year, which found that 82% of firms viewed systems and operational readiness as a hurdle at that time.

36% of respondents have noted re-papering of existing transaction and agreements as a challenge, while 45% of respondents highlighted difficulty around choosing new alternative rates and conventions. In addition, 15% noted that customer outreach and negotiation was still a challenge. 

According to Bloomberg, the loan markets also continue to see the effects of the transition. In respect to Libor-indexed terms loans, 63% of firms said they would continue the Libor transition process throughput 2022 and possibly into early 2023 as well. Meanwhile, 15% said their timeline for term loan transitions is “undecided” and 9% said their transition process was already complete.  

“The data clearly shows that while the Libor transition is proceeding well overall, there is more work to be done,” said Jose Ribas, global head of risk and pricing solutions at Bloomberg.

“While larger banks, institutions, and many non-US entities already have a blueprint as a result of the first major wave of Libor discontinuations at the end of last year, not all global financial participants were impacted. Some US regional banks and smaller institutions with only US dollar investments may still have a ways to go,” added Tsilimos.

“As they prepare for the US dollar transition, firms should focus on making sure they are operationally ready to exit their Libor exposure (directly or through fallbacks), migrate their systems and benchmarking to non Libor based rates, and also fully understand the impact of the Libor transition on US markets such as mortgages and munis.”