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On 5 March 2021, the Financial Conduct Authority (FCA) UK
announced the cessation of most LIBOR settings by the end of 2021
and the cessation of the remaining (USD) LIBOR settings by mid-2023
[1]. While these cessation dates have largely been anticipated
since November 2020, the FCA announcement set these dates more or
less in stone and removed any uncertainty about the size of the
LIBOR fallback spreads. The fallback spreads are key ingredients of
the ISDA LIBOR fallback supplement and protocol and are tied by
design to the timing of the cessation announcement [2].
Prior to the cessation announcement, a gauge for the size of the
fallback spreads expected by the market could be obtained by
observing the par-spread implied by forward starting risk-free rate
(RFR) -LIBOR basis swaps. These implied spreads seem to have
largely converged to the fixed fallbacks spreads since the day of
the cessation announcement. In some cases, such as JPY and GBP, the
implied spreads have been relatively 'on target' for a while and
lie within less than 1 bp of the respective fixed LIBOR fallback
spreads. In other cases, such as JPY and USD, clearly corrections
towards the fixed fallback spreads occurred in the aftermath of the
announcement. Interestingly, as of 10 March 2021, a gap of about
1.5 bp between implied and fixed USD LIBOR 6M fallback spreads
persists (see figure below). The gap might close as time goes on
and in part may reflect the possibility of a further delay in the
cessation of USD LIBOR settings; the USD LIBOR 6M fallback spread,
however, remains fixed [3].
With the cessation announcement behind us, attention will likely
focus now on other outstanding LIBOR transition topics such as the
introduction of synthetic LIBOR and the issue of RFR-based term
rates.
