September 06, 2018
Assia Damianova comments on the buyside's lack of interest in getting started on the colossal task of transitioning legacy contracts away from the London interbank offered rate (Libor).
Excerpts from "Buyside Not Interested in Libor Contract Repapering," IFLR Practice Insight, September 6, 2018:
“I don’t think many on the buyside have realised quite how much of a problem this will be for them – for example their hedging is likely to be disrupted, which will cause basis risk,” said Assia Damianova, special counsel at Cadwalader, who is working with the Federal Reserve on its repobased secured overnight financing rate (Sofr).“Some say policymakers need to educate the market better, but I think the information is out there if you focus on it. Overall it seems many are waiting for someone else to sort it out for them,” she added.The recommended approach for every product is different, further complicating things.
While many derivatives market participants have been pinning their hopes on an Isda protocol, sources argue that this wouldn’t be as helpful as some think since the majority of derivatives are over-thecounter (OTC) – so are unlikely to have used Isda documentation.
“Plus the whole point of an Isda protocol is standardisation, but people with huge volumes of trades can’t honestly expect a one-size-fits-all solution to solve the Libor mismatches in all their derivatives transactions, which may be vastly different,” said Damianova. “Even across one product type there’s no uniformity, as different maturities and bespoke features may affect the analysis of how the Libor transition affects them."
“There will be corporates or borrowers out there who are transaction parties to multiple financial instruments but may end up with no say over what happens to the rate measuring their cost of credit to finance three-month debt,” said Damianova. “The buyside should be taking a more active part of the various working groups and commenting to the various consultations out there and should fight their issues now while the market is developing solutions."