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 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?