NEW YORK, June 30 (Reuters) – The latest interest rates, based on the lopsided London Interbank Offered Rate, or Libor, were released on Friday, marking the largely quiet end of nearly a decade of efforts to move away from what was once called the most important number in the world.
While there have been some efforts to modify contracts tied to Libor over the past month, the transition was well-telegraphed and no major problems are expected, credit and derivatives market participants and lawyers said in interviews.
“I feel like it’s been two to three years now that we’ve been re-booking all the legacy loans and legacy securities that we’ve acquired linked to Libor,” said Scott DiMaggio, fixed income at Alliance Bernstein. department head.
“We’re pretty comfortable with what we’re keeping,” he said.
Libor, based on banks’ quotes for how much it would cost to borrow short-term funds from each other, was first used by a Greek banker in a corner of London’s syndicated loan market in 1969 to help price an $80 million loan. The Shah of Iran.
The benchmark was formalized in 1986 and has been used as a reference rate for a wide range of financial products, including student loans, credit cards, derivatives, corporate loans and mortgages, with a peak value of more than $370 trillion.
Regulators decided to scrap it a decade ago in favor of more seamless alternatives, such as the Federal Reserve Bank of New York’s Secured Overnight Funding Rate (SOFR), after banks were fined billions of dollars for trying to manipulate Libor for profit. during the 2007-2008 financial crisis.
Friday at 11:55 BST (1055 GMT) marked the latest publication of the US dollar Libor 1-month, 3-month and 6-month rates. Other US dollar tenors have largely been withdrawn for new contracts through late 2021, along with Libor rates linked to other currencies.
Libor-based derivatives markets have already largely moved to the new benchmarks without major disruptions, while some corners of credit markets, such as syndicated loans, are dealing with contract changes, market participants said.
“For the most part, it’s trendy and looks good, but we’re in a risky business, so it’s always important to remember that there may be some consequences,” or low-probability but potentially disruptive events, said Tal Rebeck, KKR’s the leader global Libor transition efforts across private equity, credit, capital markets and real estate.
The number one tail risk for loans that don’t transition smoothly to another rate is that they can fall back to a more expensive rate, which also poses potential credit risk, he said.
To minimize disruption, the US government passed the Libor Act in March 2022. The legislation authorizes about $16 trillion in “hard legacy” contracts. those that expire after June 2023 and do not have alternative language establishing an alternative rate, and therefore cannot be. Amended – fall back on SOFR, protecting them from related litigation.
Britain’s Financial Conduct Authority has also said it will allow the use of a synthetic version of the 1, 3 and 6-month US dollar Libor settings, which do not represent the outgoing Libor methodology, until September 2024 for hard legacy contracts that do not cover underneath. US Libor Act.
Still, there are concerns about a “Y2K”-like transition, the computer hacking that was predicted to wreak havoc on IT systems around the world in the early hours of the new millennium on Jan. 1, 2000, said Gennady Goldberg, head of U.S. rates. strategy at TD Securities in New York.
“The best scenario is crickets,” he said.
Reporting by John McCrank and Gertrude Chavez-Dreyfus; Editing by Alden Bentley and Stephen Coates
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