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FIA Expo Day Two: Alternatives to LIBOR

Suzanne Cosgrove

Suzanne Cosgrove

Contributing Editor

Transitions, disruptions and outright change are not new to the futures and options industry, but at this year’s FIA Expo, those themes seemed to loom especially large.

One of the biggest changes the industry is facing is the transition from LIBOR to other benchmarks. A panel on Thursday called “The Countdown to Transitioning to IBORS,” covered that topic. An exchange deadline is more than a year away, but the panelists are keeping a close eye on the countdown.

The panel’s chair, Karen Buzard, senior counsel, US Know How at Allen & Overy, kicked off the discussion with the statement that “LIBOR is going away,” and everyone should get over it. But she added she’s already had many sleepless nights thinking about the change.

Rivals CME — represented on the Expo panel by Sean Tully, senior managing director, global head of financial and OTC products — and LCH, represented by Baskar Ramachandran, Americas head of business risk, rates and FX derivatives — seemed more worried about getting the transition and market details right than about exchange/clearing competition at this stage of the game.

CME Group also lists one- and three-month futures contracts on the Secured Overnight Financing Rate. But given the broad impact of the rate change, Tully said his goal was largely to help the industry “get to a safe place.”

Both CME and LCH had previously announced that they plan to implement a transition to the SOFR (Secured Overnight Financial Rate) discounting and price alignment in October 2020. But that move comes after a long debate over a proper replacement for the benchmark London Interbank Offered Rate (LIBOR), which has been tainted by charges of manipulation and the subject of multiple investigations in the U.S. and abroad.

in June 2017, the Alternative Reference Rates Committee (ARRC) selected the SOFR as a preferred alternative reference rate for the U.S. Marketplace. SOFR was designed and implemented by the Federal Reserve Bank of New York and the U.S. Treasury Office of Financial Research.

The LIBOR is referenced by an estimated U.S. $350 trillion of outstanding contracts in maturities ranging from overnight to more than 30 years, according to the ICE Benchmark Administration.

Representing an alternative to the alternative, Richard Sandor, Chairman and Chief Financial Officer of the American Financial Exchange (AFX), told fellow FIA panelists there was a “fundamentally flawed question” in the race to implement SOFR. “There is no asset class that I know of that has a single benchmark,” Sandor said, citing examples of multiple benchmarks for fixed-income and equities instruments.

Referring to the Federal Reserve’s work on the SOFR rate, Sandor said the Fed “has been doing an excellent job in the transition … (but) we’re building institutions that make that transition easy.”

AFX facilitates Ameribor, a transaction-based interest rate benchmark for financial institutions, via its electronic trading platform. Currently, the AFX has 163 members across the U.S., representing financial institutions with under $150 billion in assets. A futures contract on the benchmark was launched on AFX’s partner exchange Cboe Futures Exchange on August 16, 2019.
“As an economist, I only know one thing,” Sandor said, “diversification and choice is good.”

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