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September 1, 2014

Moving Away From LIBOR | A More Complex OTC Market

Regulators see a new future for the OTC market without LIBOR as the central benchmark

Risk have an extensive article on a report by the FSB OSSG on reforming LIBOR (or replacing it in some sense), the FSB press release explains the context and the full report is on their website.

Risk summarised this by saying:

Libor is bad for you. Market participants know it, but lack the willpower to do anything about a reference rate that anchors roughly 60% of over-the-counter interest rate derivatives, so central banks and supervisors are going to help users kick the habit. And they don't care how unpleasant the withdrawal symptoms are.

Key points include:

  • Using a variety of means to move the market to a wider range of benchmark rates
  • Suggesting CCPs increase margin requirements to incent firms to use the new reference rates
  • The need to develop liquidity in these new rates, and the need to hedge basis risk between them
  • The difficulty of getting low volume end users to migrate to new benchmarks, given the risk they find themselves holders of 'legacy' trades in the current indices

If you have a subs to Risk the full story is here: http://www.risk.net/risk-magazine/feature/2362168/central-banks-ready-to-break-swap-markets-libor-habit

This move from the FSB and national regulators will cause a wave of change in the markets, for instance, given the criteria that a product must be 'liquid' to enter clearing, could this undermine clearing mandates and cause a re-working of regulatory requirements?


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