Replacing the Most Important Number in the World

In July of 2019, Andrew Bailey, chief executive of the UK’s Financial Conduct Authority (FCA), which regulates LIBOR, warned: “The base case assumption should be that there will be no LIBOR publication after end 2021… Transition – and transition comfortably before end-2021 – is a better choice.”

LIBOR serves as a reference rate for an estimated $350 trillion of loans, securities, and derivatives worldwide, and LIBOR replacement will have the greatest impact on banks and other financial service firms, as well as capital-intensive companies, such as those in manufacturing, energy and real estate. For these firms, identifying the millions of contracts that have referenced LIBOR is an enormous undertaking, and repapering those contracts adds a challenging step in the LIBOR transition process.

The decision to phase out LIBOR followed the 2012 rate-fixing scandals and came after numerous reform attempts failed to restore activity for unsecured interbank term borrowing. New rules following the Global Financial Crisis exacerbated this downward momentum, and scant activity in the market threw the sustainability of LIBOR into doubt as a benchmark rate. Although the decision represented a huge shift across financial markets, regulators concluded that ending LIBOR was the right path forward.