Libor’s Likely Reprieve Is a Welcome Acknowledgment of Reality: Mark Gilbert

The financial industry has failed to embrace any potential replacements for the benchmark.

(Bloomberg Opinion)—The overseers of three-month dollar Libor are considering a stay of execution for the benchmark interest rate for trillions of dollars’ worth of securities that was scheduled to expire at the end of next year. It’s a welcome acknowledgment of the reality that the financial industry has failed to embrace any potential replacements for the suite of interest rates once dubbed the world’s most important numbers.

The London interbank offered rates dictate the pricing of everything from mortgages to corporate loans to derivatives contracts, across a range of maturities and currencies. But they’re flawed: The wholesale interbank lending market on which they were based dried up in the wake of the global financial crisis, while many of the banks responsible for setting their values have paid billions of dollars in fines for rigging the benchmarks in their own favor.

So market regulators have proposed alternatives, including the Secured Overnight Financing Rate in dollars and the Sterling Overnight Interbank Average Rate in U.K. markets. But adoption has been slow, particularly in the U.S. market. For example, in the week ended Nov. 20 almost $2.5 trillion of dollar interest-rate swaps tied to Libor were traded, compared with just $70.5 billion contracts that referenced SOFR, according to figures compiled by the International Swaps and Derivatives Association. So far this year, $96 trillion of Libor swaps outstrip the $1.8 trillion of SOFR trades.

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