May 14, 2021 - Economy

Libor replacement race clouded by multiple alternatives

Illustration of question marks made of money pattern.

Illustration: Eniola Odetunde/Axios

The Libor benchmark interest rate is going away soon and the transition to a replacement has been a bit bumpy.

The intrigue: Why anyone cares about this particular saga is related to the fact that trillions of dollars in corporate and consumer debt are pegged to it.

  • Libor fell out of favor after regulators in 2008 revealed widespread manipulation of the rate by traders at numerous banks.

Why it matters: So far investors largely aren’t raising alarm bells over the uncertainty. But the process of moving to a new benchmark, called SOFR, has dragged on — and talk of using different alternative rates is increasingly cropping up.

What’s new: Bank of America and JPMorgan used a new Bloomberg index in a sizable trade earlier this month, the WSJ writes. That index will compete with SOFR.

  • The BofA/JPM transaction could signify a fork in the road of investor opinion on the matter, as more people think multiple benchmarks will replace Libor, instead of just one, WSJ says.

What’s at stake: "The swath of those impacted by Libor is vast — like $220 trillion vast," Meredith Coffey, executive VP at the Loan Syndications and Trading Association, tells Axios.

  • "It is the benchmark rate used in setting many adjustable-rate loans worldwide — from corporate loans to mortgages to credit cards to auto loans to student loans in various countries. And it is going away."

Watch this space: Numerous alternative rates mean investors have to do more to prepare operations, technologies — and, importantly, investment strategies — for a multirate environment.

The bottom line: Large investment banks and asset managers will undoubtedly find their way through the process. But regional banks and smaller funds may not have the same depth to adapt as quickly.

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