The administrator of Libor, ICE Benchmark Administration, said Monday it would consult on a proposal to cease the publication of one week and two month US dollar Libor tenors on December 31, 2021, while other US Libor rates will continue to be published until June 30, 2023.
The announcement gives US financial markets additional time to transition existing securities away from key US dollar Libor tenors though regulators continue to urge banks to avoid using Libor benchmarks in new securities beyond 2021.
The rate, which has been tarnished due to a rigging scandal, is a benchmark for around US$200trn in US financial products.
Monday's news follows ICE's announcement on November 18 to consult on its plan to cease the publication of sterling, euro, swiss franc and yen Libor rates after December 31, 2021.
The Federal Reserve Board and the Alternative Reference Rates Committee welcomed Monday's announcement.
The Alternative Reference Rates Committee said the extension "would support a smooth transition for legacy contracts", allowing Libor transactions executed before January 1, 2022 to mature before the rates are no longer published, which would reduce confusion heading into the new year for floating rate borrowers.
“Today’s developments mark exciting headway in moving off of USD Libor. They also fully align with the ARRC’s efforts, propose a clear path for ending USD Libor, and reinforce the importance of the transition to robust reference rates like SOFR,” said Tom Wipf, ARRC chairman and vice chairman of institutional securities at Morgan Stanley.
In a joint statement however the board of governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation urged banks to cease issuing securities tied to Libor by December 31, 2021.
"Given consumer protection, litigation, and reputation risks, the agencies believe entering into new contracts that use USD Libor as a reference rate after December 31, 2021, would create safety and soundness risks and will examine bank practices accordingly," the joint statement said.
IMPACT
In the futures market, Eurodollar futures, which are linked to Libor, for 2022 to mid-2023 delivery rose by 3.5bp-5.5bp on Monday to 99.64-99.765 on this news, CME data show. These contracts had underperformed nearby deliveries partly on worries about disruption from the Libor cessation after 2021.
"I think that it may actually help liquidity in floaters as it gives the regulators an additional 18 months to figure out a way to work on an orderly transition for legacy cash instruments," said Scott Buchta, head of fixed income strategy at Brean Capital. "While we continue to see strong demand for floaters, this extension may bring some additional players back into the cash USD Libor markets as well."
In the US high-grade bond space borrowers have priced more than US$25bn of Libor-linked floating rate notes this year, most of which will mature in 2023, according to IFR data.
The Fed's preferred alternative to Libor, the Secured Overnight Financing Rate, gained traction in the high-grade bond space this year, but was still used less frequently than Libor.
Borrowers priced US$13.2bn of SOFR-linked high-grade bonds this year up from US$6.6bn in the previous two years combined, according to IFR data.
In the structured finance sector, the migration to SOFR has been light with much of the activity led by Fannie Mae and Freddie Mac on their mortgage financing programs.
The move also provides a respite for lenders to transition government-backed student loans and other floating-rate consumer and business loans away from Libor.
"These announcements represent critical steps in the effort to facilitate an orderly wind-down of USD Libor," John Williams, president of the Federal Reserve Bank of New York, said in a press release. "They propose a clear picture of the future, to help support transition planning over the next year and beyond.