On April 25, 2018, ICE Benchmark Administration, the administrator of the LIBOR benchmark, published a report setting out how it proposes to transition panel banks to the new "Waterfall Methodology" outlined in its ICE LIBOR Output Statement, which was updated following a feedback statement in March 2017 on the evolution of the London Interbank Offered Rate. LIBOR is a widely used benchmark for short-term interest rates. It is produced for five currencies and seven tenors, resulting in the publication of 35 rates every applicable London business day.
The ICE LIBOR Output Statement sets out a single LIBOR definition and a more standardized, transaction data-driven methodology for LIBOR panel banks' submissions. IBA's intention in introducing the new methodology is to publish, in all market circumstances, a wholesale funding rate anchored in unsecured, wholesale funding transactions to the greatest extent possible.
The current methodology used for submissions involves panel banks basing their submissions, for each currency and tenor pair, on the LIBOR Submission Question, "At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size just prior to 11 am?"
The LIBOR Submission Question will be replaced by the new Waterfall Methodology. Panel banks will instead use eligible transaction data where available, transaction-derived data otherwise, and, if neither is available, market and transaction data-based expert judgement, appropriately framed, using the bank's own internally approved procedure, which would be based on a set of permitted inputs and agreed with IBA.
IBA plans to start the transition in the coming weeks, and intends that the process will be gradual to minimize operational and technological risks. The transition should, however, be completed no later than the first quarter of 2019.
The Financial Conduct Authority's Chief Executive, Andrew Bailey, gave a speech in July 2017 on the future of LIBOR, discussing the possible transition to alternative reference rates that are based firmly on transactions and the need for panel bank support for LIBOR until the end of 2021, to enable a transition that can be planned and can be executed smoothly. It was subsequently announced in November 2017 that the panel banks' support had been confirmed. IBA states in its report that it will engage with stakeholders to identify a framework to seek to continue to publish the LIBOR rates that are critical to the global financial system beyond the end of 2021, alongside the alternative risk-free rates that are being developed.
The ICE LIBOR Evolution Report is available at: https://www.theice.com/publicdocs/ICE_LIBOR_Evolution_Report_25_April_2018.pdf, the ICE LIBOR Output Statement is available at: https://www.theice.com/publicdocs/ICE_LIBOR_Output_Statement.pdf, the FCA Speech on the Future of LIBOR is available at: https://www.fca.org.uk/news/speeches/the-future-of-libor and details of the November 2017 announcement are available at: https://finreg.shearman.com/libor-benchmark-confirmed-until-2021.
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