Moody's: 'Window Is Fast Closing' To Limit LIBOR Disruption

The UK's London Interbank Offered Rate (LIBOR) is currently the world's most widely used reference rate, providing a benchmark for approximately $350trn worth of financial products, according to legal firm Ashurst.

Bond managers take action to tackle risks from scandal-hit LIBOR phase-out

However, a big shake-up is looming as bank traders were found to have been manipulating LIBOR in the wake of the financial crisis, leading to around $9bn in fines and several convictions, and ultimately the decision by regulators to phase out LIBOR altogether by 2021.

In the UK, the working replacement is SONIA; a near risk-free alternative derivatives reference rate that reflects banks' and building societies' overnight funding rates in the sterling unsecured market.

Different markets and regulators across the world have also begun preparations for implementing similar replacements, such as the Secured Overnight Financing Rate in the US.

A report published by Moody's Investors Services on Thursday (16 May) found around a third of non-bank institutions have adopted a remedial plan to deal with the potential fall-out from the transition, compared to two-thirds of banks.

Moody's warned firms face financial and valuation risks, legal risks that clients and counterparties may not adhere to industry protocols and operational risks that processes and systems will not be ready and will disrupt business.

Despite this, just 32% of non-bank respondents to the survey said the risks associated with the transition to the new alternative reference rates is material or very material, compared to 73% of banks. Nearly 70% of non-banks thought the risk "is limited or nonmaterial".

Moody's said: "There are some large, globally active [non-banks] in EMEA and Asia that have yet to start transition planning and, although there is still time to start, the window is fast closing and prompt action will likely be required to avoid disruption."

Moody's acknowledged that non-banks are less concerned than banks with transition risk "because they generally have lower exposure to floating-rate instruments in their funding structures".

In addition, it said, investment portfolios generally tend to have limited exposure to floating-rate products.

In addition, some non-bank respondents said "a large portion of their IBOR asset exposure will mature before the end of 2021".

For those instruments that have contractual maturity beyond 2021, they said they expect calls and re-financings to lower their exposure.

Update: Ex-Barclays EURIBOR riggers handed nine year sentence

Moody's said: "Transition risk for [non-banks] tends to be more concentrated in securitised products as well as interest rate and currency hedging instruments.

"The transition risks related to hedging instruments such as swaps, though still significant given the high notional value of contracts outstanding, are more contained because they are bilateral in nature.

"Bonds, by contrast, are multilateral and typically require consent from a majority or all investors to make amendments to a transaction."