With LIBOR Dead, $400 Trillion In Assets Are Stuck In Limbo

Tyler Durden's picture

In an unexpected announcement, earlier this week the U.K.'s top regulator, the Financial Conduct Authority which is tasked with overseeing Libor, announced that the world's most important, and manipulated, benchmark rate will be phased out by 2021, catching countless FX, credit, derivative, and other traders by surprise because while much attention had been given to possible LIBOR alternatives across the globe (in a time when the credibility of the Libor was non-existent) this was the first time an end date had been suggested for the global benchmark, which as we explained on Thursday, had died from disuse over the past 5 years.

Commenting on the decision, NatWest Markets' Blake Gwinn told Bloomberg that the decision was largely inevitable: “There had never been an answer as to how you get market participants to adopt a new benchmark. It was clear at some point authorities were going to force them. The FCA can compel people to participate in Libor. What can ICE do if they’ve lost the ability to get banks to submit Libor rates?”

And while the rationale for replacing Libor is well understood (for those unfamiliar, read David Enrich's comprehensive account of Libor rigging "The Spider Network"), there are still no clear alternatives. Ultimately, as Bank of America calculates, "moving an existing $9.6 trillion retail mortgage market, $3.5 trillion commercial real estate market, $3.4 trillion loan market and a $350 trillion derivatives market is a herculean task." A partial breakdown of the roughly $400 trillion in global Libor-referencing assets is shown in the table below.

And with nearly half a quadrillion dollar in securities referncing a benchmark that is set to expire in under 5 years, the biggest problem is one of continuity: as Bloomberg calculated last week, in addition to the hundreds of trillion in referencing securities,  there is also currently an open interest of 170,000 eurodollar futures contracts expiring in 2022 and beyond - contracts that settle into a benchmark that will no longer exist. "What are existing contract holders and market makers supposed to do?"

Then there is the question of succession: with over $300 trillion in derivative trades, and countless billions in floating debt contracts, referening Libor, the pressing question is what will replace it, and how will the transition be implemented seamlessly?

According to Bank of America, one possible option to achieve the transition could be to move to a "fixed-spread" Libor benchmark. In this scenario, regulators and market participants could agree for Libor to be hardcoded as a fixed spread over the underlying benchmark of their choice (BTFR-broad Treasury financing rate in the US, SONIA in UK etc). This could help to ensure that contracts that rely on Libor could continue to have a reference rate while the rate itself would move based on the regulator's preferred benchmark.

The option obviously would raise some concerns around what spread to be chosen, the term structure of the fixed spread (for 1m vs. 3m libor for example) - but these, BofA believes, would be easier challenges to address than renegotiating and re-hedging existing contracts.

There is a third problem: while the above scenario could be one option for a short term solution, the longer term concern continues to be the lack of a clear alternative for new contracts. Acccoring to BofA's Mark Cabana, the FCA announcement likely increases activity in the OIS market (both receive and pay flows) - but ultimately, the OIS market (overnight indexed swaps) is based on a fed funds rate whose own future is unclear in a system of non-zero excess reserves dwindling underlying volumes (chart below).

Another option is the BTFR rate (broad Treasury financing rate) which was selected by the Alternative Reference Rates Committee or ARCC (which is having its inaugural meeting on August 1) - but the market has gone down this route before with little success in the GC futures market given declining GCF volumes.

In the end, BofA warns that the most likely emerging scenario is one "involving a fractured derivatives market with multiple underlying benchmarks across different countries developing."Worse, note that the FCA suggests that the IBA and panel banks could continue to produce Libor but the FCA would no longer persuade panel banks to stay.

Finally, what makes the above especially problematic, is that 2021 is when the Fed's balance sheet shrinkage is expected to conclude (according to NY Fed estimates), and when short term rates are to be at their tightening peaks according to sellside estimates. That this will come at a time when there is no effective way to trade, or hedge, unsecured short-term rates - which will by then be roughly 2% higher than where they are now according to the Fed's dot plot...

... will make the Fed's normalization, from a market standpoint, especially "interesting", if not impossible.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Dragon HAwk's picture

Just promise anything  3 years out, nobody will remember anything with that long of a time frame, or just pick a number any number

WordSmith2013's picture

The LIBOR fraud is a major part of Deep State's plan to oust Trump.




Deep State Determined to Take Out Trump, Only the American People Can Stop It
GUS100CORRINA's picture

With LIBOR Dead, $400 Trillion In Assets Are Stuck In Limbo

My response: Talk about financial WMD, this whole LIBOR situation is DOWNRIGHT UGLY!!!!

NotApplicable's picture

Given the lack of any connection between LIBOR and reality, just pick a fucking number and be done with it.

Yukon Cornholius's picture

Watched the Big Short again last night, and I had to laugh at how miniscule those numbers seem by today's comparison. We're so fuckin fucked.

Manthong's picture

I am declaring the 1 year ThongBOR rate to be 1.72894 effective immediately

Who wants to pay me to move it up or down a bit?


BullyBearish's picture

this is a DIRECT admission that trump is a certified member of the deep state:

  15m15 minutes ago


U.S. Stock Market up almost 20% since Election!

...and a certified FOOL

nidaar's picture

"Stuck In Limbo"

I'd say let the market figure it out, as it should be

OverTheHedge's picture

"And with nearly half a quadrillion dollar in securities "

Good job we don't have any inflation, or we would be talking about Zimbabwe numbers.

Antifaschistische's picture

with the CBs stepping in and setting their bids, with a near limitless ability to soak up the sell...who needs libor anyway.  There is no market left, the CBs target it all.

Arnold's picture

There is some intellectual argument whether the Shemittah was in 2015 0r 2017.

Let the fields go fallow.


max2205's picture

Savings accounts have been dead for 9 years

virgule's picture

The whole discussion is dumb: keep LIBOR, just change it's definition to something else that works better. No need to change a quadrillion documents or contracts

MisterMousePotato's picture

You never read Corbin on Contracts, did you?

blanketof ash's picture

there is when you are paid to rewrite the contracts.

Heavy McNuggets's picture

I wonder how much of the hundreds of trillions in interest rate swaps is tied to LIBOR?

logicalman's picture

$400 Trillion??

Peanuts, it's only $53,000 for every person on earth.

People surviving on two dollars a day, if they save half of it will only have to live 146 years to pay off their share.

runswithscissors's picture

The thieving jews stole everything and left you with a bunch of worthless derivatives. 

Stuck on Zero's picture

Get rid of M3. Get rid of Libor. Get rid of any metrics to judge the state of the market.

Son of Captain Nemo's picture

"Deep State Determined to Take Out Trump, Only the American People Can Stop It"

With his official signing (http://www.zerohedge.com/news/2017-07-28/trump-confirms-he-will-sign-rus...) of starting a major World War, "WHY" on earth would the American people stop "it"?!!!

He's Hillary without a pair of testicles!

And you must be a troll.

rubiconsolutions's picture

It's all digital so can't they just use QucikBooks and do an accounting entry to offset it?


/sarc (for the uninitiated)

Honest Sam's picture

Don't be shy.  That's precisely what they can do. 

Arnold's picture

Timmy Geithner as consultant.

cheech_wizard's picture

3 years? The U.S. government does it right... it's always 10 years.


GunnerySgtHartman's picture

They're getting rid of LIBOR because 1) the LIBOR fraud has been exposed and 2) they have a new-and-improved way to screw everyone over.

Putrid_Scum's picture

Information channels saying US banks have begun to purge credit accounts used to buy Bitcoin and/or Gold. Accounts used to buy Gold and Bitcoin are flagged, shut down, and transactions cancelled.


Chase and BoA are confirmed, this has already negatively affected Hedgers planning on buying PMs with debt before The Reset


WordSmith2013's picture
Collateral Damage: U.S. Sanctions Aimed at Russia Strike Western European Allies




HUGE moves and maneuvers on the global geopolitical chessboard are conneted to this LIBOR scam. 

A. Boaty's picture

We could let market forces determine interest rates, but that would make too much sense.

veritas semper vinces's picture

Yes,but you'll have to have markets first.

Mikeyyy's picture

That's the intent here, but the issue is, what market?  There are flaws pointed out in the article about the various market based measures.  


AND, even when an index or security is chosen, all the contracts will have to be rewritten and spreads reconfigured.  It's a massive problem aind one that will not be resolved by 2021.

Too-Big-to-Bail's picture

A LIBOR becomes truth when stated often enough

Sam Clemons's picture

I don't get it. Why would they get rid of something that has so much depending on it?

quadraspleen's picture

You answered your own question

lolmao500's picture

Cancel it all. Derivatives are a scam anyways. Those 400T are worth NOTHING in the real world

land_of_the_few's picture

By comparison, all the gold ever mined in history amounts to around 8.2T USD or 171,300 tonnes.

Swamp Yankee's picture

'Limbo' my a$$.


That stash is sitting there breeding ricky-tick interest for some invisa-chud.

Ban KKiller's picture

LIBOR problems fixed with creative accounting...make up new guideline, say "adjustable rate" and jam every former LIBOR tied contract to it. What problem? New guide created by IMF or BIS or....me! 

Honest Sam's picture

It's called,  "LIe-Bor", for a reason. 

indio007's picture

Found the straw that is going to break the camel's back. $400 trillion in contracts that are not enforceable.

Son of Captain Nemo's picture

"Found the straw that is going to break the camel's back. $400 trillion in contracts that are not enforceable."

You captured the essence of this conundrum in a "nutshell"

Rabbi Chaim Cohen's picture

Non-issue in these days of insanity, someone will announce new CB policy that changes LIBOR to some new repackaged benchmark OR announce that all previously LIBOR-based securities will no be based on __________, Or ???

The force of Central Banking ostensibly wields the force of law in most of the western world in this "teetering one the precipice" place we find ourselves. To me this means the law will follow the bank's dictate. Everyone will be made to pay up, even for contracts that SHOULD be legally dissolved because of the LIBOR debacle & dissolution.

Son of Captain Nemo's picture

You mean of course until the Petrodollar and everyone else that is pegged to it decide to go there separate ways which started in earnest after 2010...

Which means the Anglo-Zionists will keep doing it with the "hopium" of threatening anyone else at GUN POINT (https://www.rt.com/news/397928-us-warning-shots-iran/) who won't capitulate in buying there securities... And while their bonds continue to smell increasingly rancid every second of every day THAT NO ONE IN THEIR RIGHT MIND WILL OWN... i.e. Russia, Iran, China, North Korean and Syria at the the receiving end (https://southfront.org/sanctions-china-russia-iran-north-korea-part-glob...) as the last remaining holdouts (and soon to be EU members that are ready to call it a day and move the "plantation" East (https://www.rt.com/news/397955-majority-germans-against-russia-sanctions/)) the game is nigh finished!...

The only way the existing cadre of CBs in Western Europe and North America will survive is starting WWIII which they know they will LOSE!

Ergo... "DEAD" IS ALREADY "DEAD"!... AND NOT "FRESHLY" either!

Fixed it!!!

7thGenMO's picture

Agree, but the anonymous oligarchs that own The Fed will also threaten traditional American freedoms to protect their system.  How so few can see that controlling the "markets" ultimately ends up in a tyrannical society of social control is beyond me.

Son of Captain Nemo's picture


Allow me to retort...

Money is the catalyst for destroying every vestige of those "freedoms" that you allude to that are being decimated. But remember that with those freedoms of which you speak man has the burden of choice in embracing completely those "false idols" to consume him, or instead another "path"!

Wasn't it that European aristocrat in the 18th Century that served the interests of royalty throughout Western Europe most importantly London that said

"give me control of the money and I care not who makes the laws"!...

Twas always thus And always thus will be....

Bankster Kibble's picture

I've got some questions about that.

Who are the big holders of LIBOR priced derivatives?

USA gov't guaranteed  $300 trillion of derivatives a few years ago. Does that exposure still exist? And how much volume was LIBOR priced? And will the banks expect payment from Uncle Sam in 2022?

At what point do losses in off-balance sheet investments roll onto the income statement? Do they ever get recognized on the balance sheet?


Just curious.

Rick Cerone's picture

The Chinese would have taken their organs while they were still alive.

Kickaha's picture

Require the instantaneous internet reporting of all inter-bank loans to a non-profit company run by directors who cannot be bankers and must be appointed by some sort of citizens commission.  Enact penalties for non-reporting or intentional mis-reporting, or gross negligence in reporting, maybe surgical removal of one gonad from the bankers who conspired to try and rig the LIBOR rate via non-reporting, late reporting, or false reporting of any sort.  Second offense:  remove remaining gonad and lifetime ban from financial industy.  Let computer average everything out overnight, and report the average interbank loan rate daily.

This is only an issue if people are debating which crooks will fix LIBOR under some new system to replace the old system that allowed the former crooks to fix LIBOR.


Cloud9.5's picture

My ignorance on this topic is huge.  You guys who are smarter than I am tell me how this is going to impact a lowly peasant like myself who has the lion’s share of his wealth in a credit union and local rental properties?

Arnold's picture

Direct influence on what you pay for money.
Not a generic you, YOU.


"Libor is widely used as a reference rate for many financial instruments in both financial markets and commercial fields. There are three major classifications of interest rate fixings instruments, including standard inter bank products, commercial field products, and hybrid products which often use Libor as their reference rate.[19]"