In this edition of In the Know, we look at the move away from LIBORs toward alternative near-risk-free rates (RFRs). In this article we assess the progress to date and the challenges that remain.
- LIBOR transition has progressed well for sterling, Swiss franc and Japanese yen financial contracts, with wide acceptance, and adoption, of RFRs in all market sectors in new contracts and dwindling volumes of legacy contracts still awaiting remediation.
- Whilst progress for US dollar financial contracts has been slower. Work has accelerated during 2022. However, US dollar LIBOR transition poses unique challenges due to its widespread use globally.
- Clear and consistent market consensus has developed around the application of RFRs in sterling, Swiss franc and Japanese yen financial contracts with a compounded in arrears rate structure favored for the majority of loans.
- US dollar loan markets in the US, in contrast, are consistently favoring a forward-looking term rate based on SOFR, the US RFR (Term SOFR). This consensus is impacting the US dollar markets outside the US with increasing use of Term SOFR in US dollar transactions with non-US entities.
- Whilst there are no current plans for EURIBOR to cease publication, interbank-offered rates for other currencies either may, or in some cases will, cease in the future.
- This will pose a continuing challenge for market participants to monitor and adapt to changes.