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New borrowing rates are coming, but which will dominate?

It was easy when LIBOR could be trusted, contracts were written specifying LIBOR rates and no-one worried. But now, the rate to be written in the contract is not automatically LIBOR. Or is it? Any new rating system has to be supported and adopted globally.

The future of LIBOR was brought into question as The Treasurer reported, by: “July’s announcement from FCA chief executive Andrew Bailey that the body will no longer exercise its influence to facilitate the production of Libor has therefore been widely interpreted as raising serious questions about the benchmark’s sustainability after the end of 2021: the FCA’s chosen cut-off date.” 

New rate systems and methodology

The new rates - US and UK - are at present overnight. They may develop into or have associated rates that go further down the yield curve but likely as look back" rates in which the final interest to be paid/received can only be determined at the end of the interest period (unlike LIBOR that is a look forward rate, known at the start of the interest period). The new rates also don't include liquidity or maturity or bank credit premiums, as LIBOR does.

However, the financial services/speculative use of derivatives will move to where the liquidity is. Exchanges in the US have said they will start new-rate based derivatives. Even if "the authorities" or banks allow LIBOR to continue after 2021, then, it may not be economic to produce LIBOR if the paying user community falls to too low a level.

ICE LIBOR 

The development of ICE LIBOR continues with a three month test at the end of 2017 - see, which produced extremely positive results. Crucially, the test showed that corporate treasurers could have confidence that the new ICE LIBOR represents the banks’ true cost of borrowing and that the rate could not be manipulated. 

The owner of the new ICE LIBOR rating system, Intercontinental Exchange, definely to want to continue. Hester Serafini, president of ICE Clear US, was recently quoted saying the London Interbank Offered Rate will exist after a 2021 target date to shift to alternatives. "The very strong feedback we're getting from market participants is that they really want Libor to continue and that they want Libor to continue to exist post-2021.”

But there has been no announcement on implementing Phase 1 LIBOR yet. However, CTMfile expect ICE (and FCA) to allow a few weeks to get market feedback from their recent test and then at some stage to announce yes or no. Then perhaps banks would move on to the Phase 1 rates as it suits them. Probably this process will be completed by year end. 

Treasury Associations

Support for each rate will decide whether it survives or not. The support from the treasury associations is critical. The ACT in the UK and the AFP in the US are arguing that banks and corporates should have the choice of LIBOR and all other new rates and let the market decide. 


CTMfile take: The future of global rates is not yet a done deal. But one thing is clear: any new rate that is adopted globally must be transaction based and offer no opportunities for tampering, which is what ICE LIBOR offers. ICE LIBOR is the one to beat.


This item appears in the following sections:
Cash & Liquidity Management
Global Cash & Liquidity Management
Financing
Financing Short-Medium Term Deficits

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