LIBOR disappearance by 2021
What does it mean? How to respond?
On 27 July 2017, the UK Financial Conduct Authority announced its intention to dismiss banks contributing to the LIBOR calculation from their obligation to participate in the LIBOR fixing from 2021 onwards.
This change has put both Islamic and conventional financial institutions with significant exposure to LIBOR in a difficult situation. They have to transition away from LIBOR as the go-to reference rate. This is due to the extent in which LIBOR is used in the financial world, having been the reference rate that underpins more than US$200 trillion of financial contracts, derivatives, bonds, loans and other exposures worldwide.
Various national working groups have been established for each of the five LIBOR currencies to facilitate the transition process. Each working group has selected their preferred alternative reference rate for LIBOR, but the transition progress for each currency is at different stages, with some currencies more advanced than others.
With Islamic finance deeply rooted in such an interconnected global banking system, Islamic financial institutions cannot simply invent their own reference rate. They may also have to rely on bigger and more liquid LIBOR replacement reference rates as a benchmark to determine the profit rate.
Find out why LIBOR is being discontinued, which are the areas affected by the transition, and ways to respond to the transition, in the article attached.
This article was first published in Islamic Finance news Volume 17 Issue 19 dated the 13th May 2020.
By Justin Ong, FSI Financial and Regulatory Risk Leader and Leong Ghai Jon, Risk Advisory Manager at Deloitte Malaysia