Tuesday, 19 November 2019

ISDA Consultation on IBOR fallback: GBP impacts

The results of the final consultation on parameters and tenors had been published on Friday 15 November 2019. The decision is to use "historical median approach over a 5-year lookback period" with "two banking day backward shift adjustment period".

Based on the median and 5-year lookback period, we have recomputed our estimations for the LIBOR-SONIA spreads in GBP. The two graphs below are for the LIBOR-3M and the LIBOR-6M. The LIBOR-6M/SONIA spread is obtained by combining the more liquid LIBOR-6M/LIBOR-3M and LIBOR3M-SONIA spreads.

The graphs contain the historical data for LIBOR-SONIA basis swaps with a tenor of 30-year (dark blue line) and with a tenor of 1-year (light blue line). The vertical red lines correspond to the consultations important dates: start of the first consultation in July 2018, publication of the results of the first consultation on 26 November 2018, spread consultation start on 19 September 2019 and the spread consultation results on 15 November 2019. Both the LIBOR-3M and LIBOR-6M spread to SONIA have moved considerably after Friday's results.

The grey lines represent the estimates of historical spreads using different methodologies. Between the first consultation results and the spread consultation publication, we have used 5, 7 and 10-year periods and both median and mean (light grey) in all cases with different announcement dates. Between the the spread consultation publication and its results, only two scenarios were still under discussion: the 10-year period with mean (middle grey) and the 5-year period with median (dark grey). From Friday onward, only this last scenario is still of interest.

Figure 1: Market (1-year and 30-year) and historical spread for LIBOR-3M/SONIA.
Figure 1: Market (1-year and 30-year) and historical spread for LIBOR-6M/SONIA.

We can see that in both cases, the market spread for 30-year tenor moved to the 5-year period median values. The market spread for 1-year tenor seems unaffected. From our computations, we see still some room for the LIBOR-3M/SONIA spread to narrow by a couple of basis points.

All the figures above are for cleared swaps. The impacts on uncleared swaps need to be reviewed separately.