Alea iacta est: LIBOR non est

Some random comments about the LIBOR cessation announced on 5 March 2021.

The IBA decision (forced by the panel banks) is now public.
LIBOR with cease on

• 31 December 2021: all but USD tenors below
• 30 June 2023: USD-LIBOR ON, 1, 2, 3, 6, 12 M.
  

All LIBOR are expected to stay representative to the last date. Interesting that FCA can assert that they are confident that USD-LIBOR will stay representative for more than 2 years while a couple of months ago they said that they would provide information about non-representativeness in 2021 by the end of 2020.

A potential "synthetic LIBOR" may be decided after those dates (depending on the FCA getting the power from the lawmakers). But this would not be a true LIBOR from an economical or quantitative perspective. The potential synthetic LIBORs by FCA are for GBP, JPY and USD 1, 3 and 6 months.

The debate about pre-cessation trigger that was considered as "essential" a year or so ago turn out to be a nothing-burger.

The adjustment spread is fixed at level computed on 5 March. ISDA confirms the "triggering a fixing of the fallback spread adjustment at the point of the announcement" and that "spread has now been fixed", but did not provide that spread value. Bloomberg has published spread values. The values are in line with the values I have published over the last months (e.g here and here and in many seminars). I will publish my detailed computation for 5 March in the coming days and see if I come to exactly the same numbers. Note that many of the spreads are negative (in CHF, GBP and JPY); probably not what was expected from "credit spreads".

The announcement was done during the week and not when markets were closed. Creating an unnecessary material non-public information situation. My long stated recommendation for announcements on week-ends was not followed. This combined with the indirect announcement about the spread value increased the asymmetry in the transition.

The announcements highlighted a double failure by regulators: remember that Andrew Bailey said in July 2017 "It would therefore no longer be necessary for us to sustain the benchmark through our influence or legal powers." Any discussion for synthetic LIBOR or non-representativeness is thus a failure by FCA in general and A. Bailey in particular to truly understand what LIBOR represented to the market.

The second failure is that if a synthetic LIBOR was created by the FCA, it would immediately be considered as non-representative by the same FCA. How can you create something, call it fair and at the very same moment call it unrepresentative. A little bit of coherence would help here.

The FCA has said that ISDA spread is "approximately fair" and that the banks have the obligation to treat client "farily". This combined with IBA BYI being fairly similar to LIBOR from an economical perspective, would mean, by "transitivity of fairness" that clients, even those who have signed the ISDA protocol or traded after 25 January 2021, should be allowed to ask at any time and have their contracts transferred from ISDA fallback to BYI (or another similar index like BBG BSBY or Markit index).

FCA indicated that "this methodology provides in our view a fair approximation of what panel bank LIBOR would have been". In this context, "fair" and "approximation" should be considered as oxymoron. If the exact context of the use of rate is unknown, you cannot estimate the impact of the "approximation" and as such it is not possible to have an opinion on its fairness.

Even if the fixed spread was providing a correct expected value for the potential future value, (for the avoidance of any doubt, I believe it does not), that would be far from fair, even for valuation purposes. For example an option on the spread would not be treated fairly if you replace the actual spread by its expected value, the time value of the spread dynamic would be lost.

The FCA considers that a consultation run by a private company with less that one hundred respondents, most of them conflicted, is a solid enough basis to decide of a new law (creating synthetic LIBOR power) to be used in a different context for all end users, including retail customers.

By such a definition of fair, LIBOR has always been a fair number, especially when it was manipulated by panel banks collusion. If the bank consensus make the fallback adjustment spread fair, the bank collusion around LIBOR manipulation, which is a form of consensus, made LIBOR "fair" also at that time. This is not the way I'm usually using the word "fair", but as I was reminded recently, in English the word "fair" also means "open to legitimate [...] ridicule".

We can hear in the background a "ping-pong" between ISDA, IBA and FCA: the problems are not my fault, they are the others' fault. The truth is that problems are collective in origin and impacts. Each party carving out its own responsibility extend is not a proof of their lack of responsibility but a proof of their lack of interest in the big picture. "CYA" seems to be the acronym of the day.

I encourage end users to review all their financial instruments linked to LIBOR individually and analyze the impacts in detail with expert independent advice. Notes and consultations by ISDA, FCA and counterparties are not independent advises, they should be considered as marketing material. Better to spend 10 thousands USD in expert advice up-front than losing 10 millions USD in financial impacts and legal fees "in-arrears". I know that ISDA, FCA and others are pushing for "in-arrears" in the transition context and for specific cases I agree with them; but as always, "prevention is better than cure" and I strongly encourage transition prevention.