Reports Of Libor’s Death Are Greatly Exaggerated: Fed Extends Libor Life From End-2021 To June 2023

In recent years we have repeatedly predicted that plans to phase out Libor by the end of 2021 will never play out because the banking world is simply unprepared to transition to Libor’s replacement rate – the SOFR – which suffered catastrophic volatility and outsizied moves during the March crash, which would have crushed most entities that have exposure to SOFR, and confirming that it is nowhere near ready to serve as a benchmark rate for hundreds of trillions of floating rate securities.

Moments ago the Fed confirmed as much when it announced that the administrator of dollar libor, the ICE Benchmark Administration (IBA), is set to extend the key tenors on the “discredited” interest-rate benchmark until the end of June 2023, and could extend three-month dollar Libor one-and-a-half years beyond its previously anticipated retirement date, which had been expected at the end of 2021. Six-month and 12-month dollar Libor could also be extended.

IBA said it would consult on its intention to cease the publication of the one week and two month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023. This follows IBA’s plan to consult on its intention to cease the publication of all GBP, EUR, CHF and JPY LIBOR settings immediately following the LIBOR publication on December 31, 2021. IBA expects to close the consultation for feedback by the end of January 2021

Nonetheless, in a statement, the Fed said that “the Federal Reserve Board, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency today issued a statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, in order to facilitate an orderly—and safe and sound— LIBOR transition.”

Alas, since SOFR is structurally flawed by its very definition – a definition which makes it responsible to market forces without the possibility for human overrides, manipulative or otherwise – means that this extension will not be the last.

In recent years, regulators have been seeking to phase out Libor, or the London interbank offered rate, which is one of the bedrocks of the global financial system and underpins hundreds of trillions of dollars in financial assets, following countless manipulation scandals and the drying up of trading data used to inform the rate, but those efforts have been waylaid during the coronavirus pandemic. The IBA will consult on plans to cease publishing one-week and two-month Libor on time, according to the statement.

“Extending the publication of certain USD Libor tenors until June 30, 2023 would allow most legacy USD Libor contracts to mature before Libor experiences disruptions,” they said.

A senior Federal Reserve official said the path being set out calls for banks to stop writing new U.S. dollar Libor contracts by the end of 2021, but allows most legacy contracts that were written before that to mature before Libor stops.

The full statement from the Fed is below: