JPMorgan Chase – Regulators tell banks it’s time to stop using Libor
Regulators are stepping up efforts to close Libor transactions by the end of the year.
Last week, the Commodity Futures Trading Commission told brokers promoting derivative trading between major banks that they should stop using Libor or London interbank rates as a reference rate by July 26. An interest rate benchmark that supports trillions of dollars worth of financial contracts. Authorities decided a few years ago, after a widespread Libor rigging scandal, to disappear by the end of 2021.
The new guidelines come from the CFTC Subcommittee, which operates under an initiative called “SOFR First.” It aims to convince players in the market to adopt SOFR or Secured Overnight Financing Rate instead of Libor. SOFR is the preferred alternative for regulators and many large banks.
As of July 26, major banks such as JP Morgan Chase JPM -0.07%
& Co. Shows certain derivatives priced in SOFR instead of Libor on the dealer’s screen. Libor’s practice remains for informational purposes only.
“Most of this is about inertia,” said Morgan Stanley banker Tom Whip. “We are facing the reality that there are no new Libor contracts by the end of this year. We don’t have much time to do this.”
Wipf is responsible for the Alternative Reference Interest Rate Commission (ARRC), which consists of major banks, insurers and asset managers working with the Federal Reserve Bank of New York to support SOFR. He also spoke on Tuesday at the ARRC panel held after the new guidelines were announced.
The CFTC Subcommittee includes representatives such as BlackRock Co., Ltd.
And Goldman Sachs Group Co., Ltd.
The announcement was a recommendation, not a definite deadline. But Wipf and colleagues said they would boost the derivatives market and link more deals to SOFR.
Top US financial officials, including Treasury Secretary Janet Yellen, said Friday that some market players weren’t moving fast enough to replace Libor and urged them to adopt SOFR.
Market participants were slower to adopt new rates than their supporters expected. There are also complaints that SOFR is short of interest rates weeks or months ahead and it is difficult to plan future interest rate risk. ARRC said it is difficult to formally recommend reference rates for these forward-looking statements due to lack of sufficient transactions and data. Following the CFTC announcement, Wipf said the ARRC should be able to recommend future-proof SOFR rates by the end of July.
Meanwhile, accounting and investors in some companies are looking at competing alternatives. While some Wall Street banks began using the Bloomberg Short-Term Bank Yield Index as a benchmark, regional banks were drawn to Amelieball, a rate sensitive to rising funding costs during the crisis. According to a recently published JP Morgan customer survey, 41% of customers prefer to use the Bloomberg index for swaps because they are most similar to Libor, compared to 34% who support SOFR.
However, when asked what was the most active benchmark in the swap market in five years, 63% of JP Morgan’s clients said it was likely SOFR. JPMorgan’s interest rate derivative strategist, Josh Younger, said this could be driven in part by the support of ARRC and the automatic conversion of outstanding Libor derivatives contracts to its index within two years. Said.
ARRC is capturing the late summer months to accelerate the transition while the bond market remains relatively calm. When the market was turbulent when the coronavirus pandemic began, lenders and asset managers had little time to focus on what they considered to be operational issues.
“It’s better to experience the pain of growth now than at the end of December,” Chris McAllister, global head of derivatives trading for insurer Prudential, told the ARRC panel.
“The market is still talking at Libor,” McAllister said, although it is possible to trade derivatives related to SOFR.
Write to Julia-Ambra Verlaine at [email protected] Zoom.com
Copyright © 2020 DowJones & Company, Inc. all rights reserved. 87990cbe856818d5eddac44c7b1cdeb8