Treasurers and the Libor ‘Pre-Cessation’ Trigger

Financial firms can’t seem to come to an agreement on the unofficial “pre-cessation” trigger that will signal the beginning of the end for Libor. Meanwhile, SOFR faces some controversy. 

By the end of the next year, the London Interbank Benchmark Offered Rate (Libor) should be phased out and is expected to replaced by one of three potential alternatives – the Secured Overnight Financing Rate (SOFR) in the United States, the Sterling Overnight Index Average (SONIA) in the United Kingdom and the Euro short-term rate (€STR) in the rest of the European region.

Liquidity is expected to slowly build up in markets but corporates are still taking their time to change the fallbacks mentioned in their contracts – the American risk-free overnight rate doesn’t fit too well with the longer duration financial products used in cash markets while investors have yet to fully support the newer European alternatives.

In any case, before regulators officially announce the end of Libor, analysts expect that a “pre-cessation” trigger, an early deadline of sorts, would help and should be incorporated in any fallback language. Everyone will then know it’s me to jump off the sinking ship that is Libor.

But the International Swaps and Derivatives Association (ISDA) states that financial institutions right now are struggling to reach an agreement on what that trigger would look like or if it’s even necessary.

“This is critically important because … [read more]

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