FEATURE
Libor transition – a sterling success? Should the structured products industry congratulate itself on successfully transitioning its sterling Libor obligations, or bite its nails in fear of unintended consequences? Perhaps both.
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hile sterling Libor is for most banks much smaller than US dollar Libor trade flow, it is still a huge book. So it has taken an equally huge, industry-wide effort for front office and back to grapple with its complex matrix of tasks – ensuring economic equivalence and seeking legal routes to transitioning legacy products, standardising reference rate treatment throughout the layers of a product, and drafting in the new floating rate terms from Isda’s 2021 definitions.
Ashurst UK/US global markets head Michael Logie (below) says industry endeavours have been “impressive,” especially since structured products effectively fall somewhere between derivatives and debt capital markets in terms of product documentation and have additional complexity. The remediation kicked off a bit later and was more involved. “Despite tight timelines and messy processes – whether via consent solicitation, or reliance on fallbacks, or starting with one mechanism and shifting to the other – it does feel as though the industry got there,” he says. This is thanks in part to broad industry coordination, including the work done by Isda, the Risk-Free Working Group, and input from the Structured Products Association and individual market participants. “From an issuer's perspective it’s helpful there has been fairly wide industry coordination around the risk-free rate
solution,” says Allen & Overy partner Andrew Sulston. “More recent vintages are more likely to have robust fallbacks, because there's very clear provision for how they should be determined.” Isda created a new set of fallbacks that aim to preserve economic equivalence, and Bloomberg has been calculating and publishing adjusted risk-free rates as fallbacks since 2020. New products now largely reference compounded Sonia in arrears, the regulator’s preferred rate, as do the substantial majority of legacy products able to switch through fallbacks or consent solicitation. It became obvious as last December approached, however, that a significant minority of products – almost exclusively widely placed with no ongoing relationship between bank and investor – would have to be transitioned to synthetic Libor as a last resort. With no promises that synthetic sterling Libor will be published beyond this December, this is a holding position rather than a solution for securities that mature after that date. “Institutions have to continue to find a better answer,” says Sulston. But nowhere have I heard mentioned the 'nuclear' option of unilateral early redemption. “You really don’t want to redeem someone and leave them with cash in a low interest-rate environment when you might be able to give them a slightly adjusted product that works better for them economically,” says a senior market source, who prefers to remain anonymous.
Despite tight timelines and messy processes [...] it does feel as though the industry got there Michael Logie, Ashurst
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