Q&A – LIBOR-linked bonds
Why is the transition away from LIBOR happening?
The London Interbank Offered Rate (LIBOR) is a measure of the average rate at which banks are willing to lend short-term funds to each other. However since the financial crisis banks no longer fund themselves in this way, and as a result concerns have arisen that LIBOR is no longer truly representative.
How does this impact the bond market?
Many bonds use LIBOR as a ‘reference rate’ – the benchmark rate against which interest rates are pegged. Transition away from LIBOR therefore requires these bonds to transition to a different reference rate.
Why are Investment Association (IA) members interested in this transition process?
The UK asset management industry is the largest in Europe and the second largest globally. As investors in LIBOR-linked securities, our members have a keen interest in encouraging active transition away from LIBOR by issuers of LIBOR-linked instruments.
How have IA members been involved in aiding this transition?
IA members have demonstrated their support through a number of initiatives, including hosting webinars and producing educational material.
Members have also worked closely with working groups, and the IA established its own internal working group – giving managers a forum to discuss this topic in more depth. We have also been engaging continuously with issuers, and supported measures that aim to alleviate barriers to transition.
When is the deadline for the transition?
The deadline is the end of December this year – only six months away. LIBOR will then be phased out by jurisdictions around the world – by that point, there should be no further issuance of LIBOR-linked instruments and all outstanding LIBOR-linked securities should have been transitioned to a new rate.
How is the transition progressing?
We are concerned that there remain a large number of outstanding LIBOR-referencing bonds which have not yet transitioned to a new rate.
Why is the IA concerned about this delay?
The potential impact of these bonds not being transitioned to the new rate ahead of the deadline is severe, with the risk of significant market disruption and harm to investors if bonds continue to reference a non-representative rate.
Ultimately, this will harm the end-client – savers. Earlier this year, the IA published a letter detailing the broader market disruption that delaying this transition could cause.
What more can be done to aid this transition?
The buy-side has been a continued strong supporter of the LIBOR transition process, and has taken numerous steps to encourage active transition, but we now need a more concerted effort with broader market participants.
We encourage all market participants to actively engage amongst themselves in order to ensure alignment and effective collaboration with the goal of achieving active transition before the deadline.
The market participants we are asking to help include:
- Issuers – as ultimately they are the ones who must launch transition processes themselves to transition their bonds away from GBP LIBOR.
- Benchmark providers – especially if non-transitioned bonds will not be removed from their indices.
- Banks and advisers – as these play a vital role in shaping consent solicitation processes, and have a key educational role to play too.
- Regulators – to provide clarity and enforce compliance with the deadline.
- Third Party Operational Providers – who should be engaging regularly with issuers and other key stakeholders as part of their management of the transition process.