ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

Just before midday in London tomorrow, the five remaining US dollar LIBOR settings will be published on a representative basis for the very last time, marking the end of one of the biggest structural changes in the history of financial markets. While it would be premature to declare the LIBOR transition a complete success until all contracts have switched smoothly to alternative reference rates, it is worth reflecting on the extraordinary collaboration and diligent preparation that was required to reach this seminal milestone.

It’s nearly six years since Andrew Bailey, then chief executive of the UK Financial Conduct Authority (FCA), told delegates at a Bloomberg event that the FCA would no longer persuade or compel banks to make LIBOR submissions after the end of 2021. That speech in July 2017 focused minds on how to address the huge volume of notional exposure to LIBOR and other interbank offered rates (IBORs). The total estimate at that time exceeded $370 trillion, across derivatives, bonds, loans, deposits and mortgages.

Given the pervasiveness of LIBOR and the challenge of removing it, many believed it simply couldn’t be done. But industry participants and policymakers came together to identify alternative reference rates, encourage adoption for new trades and put in place a robust framework for legacy LIBOR contracts. Despite the enormity of the task, a combination of industry efforts, legislative solutions and public sector initiatives have brought the finish line within reach.

Both the industry and regulators deserve credit for the rising adoption of risk-free rates (RFRs), including SOFR. With the momentum provided by the US Commodity Futures Trading Commission’s Market Risk Advisory Committee’s SOFR First initiative, which switched trading conventions for derivatives to reference SOFR on a phased basis from July 2021, trading in SOFR has increased steadily over the past two years. By April 2023, the percentage of US dollar interest rate derivatives DV01 referenced to SOFR had reached an all-time high of 70.9%, up from 7.4% in July 2021, according to the ISDA-Clarus RFR Adoption Indicator.

Even before Bailey’s speech, ISDA was asked by the Financial Stability Board’s Official Sector Steering Group in 2016 to take the lead in improving the contractual robustness of derivatives referencing LIBOR and other key IBORs. In collaboration with the industry, we developed standard fallbacks, which provide a critical safety net to automatically switch certain IBOR contracts that have ceased to exist or become non-representative to an adjusted version of the relevant RFR. We incorporated these fallbacks into ISDA’s standard definitions and developed the ISDA 2020 IBOR Fallbacks Protocol. This was critical in the smooth transition from the majority of LIBOR settings at the end of 2021 and is expected to be equally important after tomorrow’s deadline for the last US dollar settings. More than 16,100 parties from 92 countries have now adhered to the protocol, highlighting the widespread recognition of the importance of fallbacks.

Other workstreams have also played a vital role in getting to this point. For example, the SOFR First initiative was critical in boosting trading of SOFR derivatives. And recognizing the importance of term SOFR in the business loan market, the Alternative Reference Rates Committee made adjustments to its term SOFR scope-of-use recommendations in April to give dealers an additional avenue to manage the risk they accumulate by offering term SOFR hedges to end users, while continuing to recommend that interdealer trading of term SOFR should be prohibited.

As we close the book on LIBOR tomorrow, we should be proud of the painstaking work that has gone into the transition, while also recognizing this is not the end of the road. Over the coming years, we could see the retirement of a number of other IBORs, including Canada’s CDOR in June 2024. Following the playbook that has proven effective for LIBOR, ISDA will continue to provide education, resources and market-based solutions to support the transition to alternative rates.

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