In the U.S. and the U.K., the regulators have been clear: don’t expect the London Interbank Offer Rate to remain the dominant benchmark in financial markets. As its preferred replacement, the Federal Reserve has developed the Secured Overnight Financing Rate, which is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. Banks and other players in the global financial markets have three years to make the transition from Libor to one or more of the several alternative benchmark rates being developed or transacted on multiple exchanges around the world.
The encroaching deadline is causing concern among some market participants, but it need not. It’s been my experience that broad-based adoption of tools and technology can take a decade or more. We are now at a tipping point, but I believe the likely loss of Libor’s pre-eminence is more an opportunity than a challenge. We have multiple rates emerging to better serve specific segments of the market. The emerging replacement rates are based on actual trades and are better suited to different segments of the marketplace. Libor itself has undergone technical improvements aimed at correcting its past shortcomings.
So, what can bankers and their affiliates do to prepare for the transition?
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