Many of the world’s largest companies have yet to sign on to a crucial derivatives market initiative designed to ease the transition away from Libor, underscoring the challenges regulators still face in stamping out the controversial benchmark rate.
Diageo, Tesla and Walmart are among the companies that have not adhered to the International Swaps and Derivatives Association’s fallback protocol, a mechanism that allows various Libors to be replaced in old derivatives exchanges once these rates cease to exist. This contrasts sharply with the widespread adoption of the protocol by financial institutions.
Many multinationals say they are preparing for the Libor transition, and some note that there are good reasons they have not signed on to the ISDA protocol, including Libor’s still dominant role in US debt markets. The amount of financial contracts tied to the US dollar Libor has actually increased 12% since 2016 to reach US $ 223 billion, according to a recent industry report.
But experts warn that the business market as a whole, and small businesses in particular, still have a long way to go if they are to be prepared for various looming deadlines around the demise of Libor. Many Libors such as those denominated in pounds sterling, euros and yen will cease to exist at the end of the year.
And despite confirmation that the most commonly referenced US dollar libors will be available until mid-2023, regulators have said these rates should not appear in new financial contracts after the end of 2021 and urged users swaps, even the rarest, to prepare for the transition.
“There are still a lot of companies that haven’t signed up to ISDA, either because they’re figuring out what to do or because it hasn’t hit the radar yet,” Parker said. , Head of Derivatives and Structured Products Practice at Mayer Brown Law Firm. “We have found that when we reach out to buyer customers, there is a surprising lack of knowledge about this issue from many.”
ISDA’s fallback protocol played an important role in regulators’ efforts to rid markets of Libor, effectively creating a safety net for derivative transactions still tied to the much-maligned lending rate. Almost 14,000 companies have registered to date. About 95% of the interest rate swap market is now subject to the protocol, the CFTC said in February.
Most financial institutions have put their names on the ISDA protocol with a number of non-financial companies such as Apple, Microsoft and Shell. But the stickiness is generally much lower in uncompensated swaps – an area that includes corporate swap activity. The CFTC said only 69% of that corner of the market was covered by ISDA’s downturns, and that there is still a long list of companies to join.
“There are a few players active in the derivatives markets who have not signed the protocol and we understand that regulators have been in contact with them,” said Ann Battle, head of referral reform at ISDA. “There is also a large queue of companies that have not registered.”
A number of large UK companies such as Anglo American, BT, Imperial Brands, National Grid, Reckitt Benckiser, Rolls-Royce and Vodafone have not adhered to the ISDA protocol. Adoption by U.S. companies appears to be lagging even further behind, with Intel, Comcast, Oracle, PepsiCo and Verizon among the many to join.
Many of the companies in this story say they are monitoring the situation and preparing for the transition. Some also say there are good reasons they didn’t sign.
“We believe it is premature to do so given that the new risk-free rate for cash products has not yet been determined,” a Comcast spokesperson said, adding that the company still had the option. enter into bilateral agreements directly with swap counterparties.
Meanwhile, there is much less evidence of readiness among the countless number of small and medium-sized businesses that trade swaps less frequently.
Wait and watch
The consultants say the reluctance of the loan market to abandon Libor as the benchmark rate has become a major stumbling block for users of derivatives, especially in the United States. The Alternative Benchmark Rates Committee, a private sector group of companies working with the Federal Reserve, said in a March report that most U.S. banks continue to offer Libor as their primary or only interest rate lending option. variable.
“Most businesses are in a wait and see mode,” said Amol Dhargalkar, Managing Partner and Global Head of Business at consultancy Chatham Financial. “Many of these derivatives cover floating rate liabilities. If they don’t switch to Libor on their loans, why should they switch to derivatives? “
There are also concerns about the lack of liquidity in the markets linked to the guaranteed overnight funding rate, the main alternative to US dollar Libor. Only 4.7% of cleared US dollar swaps referenced alternative rates in March, according to ISDA and Clarus data, compared to 44.9% in pounds sterling.
Despite these challenges, regulators have said they expect the use of US dollar Libor in new contracts to cease by the end of this year, while the ARCC has set a target end date. June for much of this activity.
“It’s a bit of a reality check for the industry,” said Gerard Jacob, partner in the finance and risk division of Accenture. “If companies try to adhere to these best practices [ARCC recommends] they have mountains to climb in a very short time. “