ISDA has recently examined the progress in global derivative markets away from interbank offered rates to risk free rates.
In general, all major markets, other than the US, have virtually completed the transition. As at the end of 2022, almost 100% of over-the-counter (OTC) and exchange-traded derivatives (ETD) trading activity denominated in Japanese yen, sterling and Swiss franc referenced relevant RFRs. This compared to 64.1% of US Dollar interest rate derivatives referencing SOFR.
The stickiness of US Dollar LIBOR derivative trading reflects the fact that five US Dollar LIBOR settings continue to be published and will not cease until 30 June 2023 (all euro, yen, sterling and swiss franc tenors and some US dollar rates ceased at the end of 2021).
The report identifies some market developments and trends to expect in 2023:
- Market developments: leading clearing houses CME and LCH plan to convert cleared US Dollar LIBOR swaps in stages into cleared SOFR swaps ahead of the US Dollar LIBOR cessation date of 30 June 2023. The 2022 Adjustable Interest Rate (LIBOR) Act will also replace US Dollar LIBOR in tough legacy contracts (including non-cleared derivatives) governed by US law that do not have fallbacks.
- Synthetic LIBOR: to support the transition of tough legacy contracts, the UK FCA has required temporary publication of several sterling LIBOR settings on a synthetic basis (i.e. the RFR rate and a credit spread adjustment). It is currently consulting on publishing certain tenors of synthetic US Dollar LIBOR until September 2024 to aid the transition of certain legacy contracts (those without fallbacks or not transitioned mandatorily by legislation).
- Term RFRs and credit sensitive rates: somewhat contrary to the spirit of the raft of IBOR transition legislation around the world, there has been nascent markets in term RFRs (risk-free rates longer than overnight) and credit sensitive rates (rates which include a premium to reflect the credit risk of the borrower). However ISDA report that the market for derivative products linked to these rates is small: in 2022, term SOFR transactions accounted for less than 3% of monthly SOFR-linked OTC interest rate derivatives and usage of credit-sensitive rates in derivatives transactions has been minimal.
The full report is available here.
Please speak to your Mayer Brown contact if you require any advice on IBOR transition.