Replacing the IBOR Reference Rate: Wrestling the Monster to the Ground

A long string of abuses in the provision of interbank overnight rates (IBORs) prompted regulators worldwide to mandate replacements across five venues. However, the actual replacement process is turning out to be a mammoth effort, for a variety of reasons:

1. The usage of the IBORs has spread to a variety of markets – derivatives, securities, loans, and deposits – in a variety of venues. Many of these uses require modifications in account agreements as well as individual positions.
2. The replacement rates are different from the IBORs in a variety of ways, and are different from each other as well. Some replacement rates are money-market based, some are bank loan based, and all are overnight, while the IBORs are all bank loan based and have a variety of tenors.
3. Given the short period of observation, the replacement rates have not performed in the market the way many observers predicted, which may call into question their usefulness,even before they are mandated.
4. Many instruments that use the IBORs were not designed with fallback provisions, and for those that were the provisions may not reflect the actual conditions in the markets.

As a result, the replacement process at most institutions will require a carefully designed structure and sophisticated management in order to avoid an expensive and dangerous implementation failure.