Mercados financeiros: perspectivas futuras - J. P. Morgan

Video: J.P. Morgan Perspectives

Leaving LIBOR: The Long Road Ahead

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By Joyce Chang, Kimberly Harano^AC, Alex Roever^AC, Teresa C Ho^AC, Joshua Younger^AC, Fabio Bassi^AC, Francis Diamond^AC

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J.P. Morgan researchers across fixed income asset classes examine the rationale, policy and market responses and risks ahead to the implementation of interest rate benchmark reform as the move from LIBOR to new replacement reference rates advances globally.

Rationale for Benchmark Interest Rate Reform

• Interest rate benchmark reform has been driven by the post-Global Financial Crisis (GFC) decline of the underlying market that LIBOR seeks to measure, as the reduced size of the market feeding into LIBOR submissions has contributed to structural weaknesses in the calculation.

Policy and Market Responses around the Globe

• Benchmark reform in the US is a reality with SOFR passing its one-year anniversary. Average daily trade volumes of the SOFR index components are regularly in excess of $900bn, or more than 1800x the average daily unsecured bank trades underlying USD LIBOR tenors. Activity in SOFR futures and floating rate notes (FRNs) continues to build, facilitating the growth of OTC swap markets.
• There is a possibility that the Fed may shift from targeting the Fed funds rate to targeting SOFR, hastening the transition.
• The reform process for GBP is advancing with SONIA established as the risk-free rate for the UK in April 2017 and gaining a steady increase in OTC derivative and exchange-traded futures.
• The Euro area is lagging, with the ECB launch of risk-free benchmark rate €STR slated for October 2019, while Euribor will likely be alive longer than other LIBOR rates. 
• TONAR, also known as the JPY uncollateralized overnight call rate, will be used as the risk-free rate in Japan but implementation will not begin until 2H19.
• LIBOR, in its current form, will probably cease to exist after 2021 as regulators will no longer compel banks to provide quotes.

Challenges Ahead: Future Risks to Monitor

• Term reference rates still need to be developed since the new reference rates are overnight rates; the market needs to model a term structure—also known as a yield curve—with different maturities to reflect expectations about where interest rates will be in the future.
• There is some support for a “two-benchmark” approach to capture banks’ marginal term funding costs, while the ICE Benchmark Administration (IBA)—the administrator for LIBOR—announced that it is working on its own potential alternative benchmark to LIBOR, known as the US Dollar ICE Bank Yield Index (BYI) to reflect wholesale unsecured bank funding costs.
• US banks started issuing debt tied to SOFR, but European and Asian banks are lagging.
• Fallback provisions for contracts tied to LIBOR are not yet consistent, and there is no uniform approach for adoption across fixed income markets. 

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For the full analysis and disclosures related to this video presentation please see: 

J.P. Morgan Perspectives: Leaving LIBOR: The Long Road Ahead, Joyce Chang and Kimberly Harano et al., April 30, 2019

J.P. Morgan Perspectives Presentation: Leaving Libor: The Long Road Ahead, Joyce Chang and Kimberly Harano et al., May 1, 2019