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Libor transition survey: What clients told us about the road ahead
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Barclays Research conducted a survey of key aspects regarding the transition away from Libor from 27 January to 10 February. 175 market participants responded from our rates, money market and credit market client base. Overall, the survey findings suggest that investors are more optimistic about several aspects of the transition than we had expected, but they think that several hurdles remain. The key hurdles that they identified typically have industry-wide or regulatory solutions.

The vast majority of our respondents think that Libor-linked instruments are on their way out shortly after, if not by, December 2021. However, concerns about loss of value during the transition seem to be keeping a fair share of them awake, while other issues such as the appropriateness of daily compounding and the need for an unsecured credit risk premium are lower down the list of concerns.

When is the market likely to stop using Libor-linked instruments?

Source: Barclays Research

Investors are optimistic that by December 2021, the interest rate derivatives market will be Secured Overnight Financing Rate (SOFR)-based, rather than Libor-based, and that a robust forward-looking term SOFR benchmark will be available. Investors are comfortable with the International Swaps and Derivatives Association's (ISDA) recommended fall-back process as a means of transitioning out of Libor exposure and have balanced views on SOFR pricing. 

One note of concern: investors do not appear as convinced as we are that SOFR-based discounting of cleared derivatives and greater issuance in SOFR fixed income and lending products will be sufficient to catalyse the switch. Many think that regulators will need actively to discourage the use of Libor.

By when do you expect the derivatives market to be SOFR based?

Source: Barclays Research

Participant views on developments in SOFR floating rate notes (FRN) are encouraging. Our respondents generally believe that more than half of new FRN issuance will be SOFR linked by 2021, which to us is significant in light of the recent slowdown in SOFR-FRN issuance. They also support the Treasury issuing FRNs, although we are surprised by the fact that a plurality wants it to wait until a forward-looking SOFR benchmark becomes available (late 2021).

We suspect the Treasury may be looking at an earlier timeline. A majority also thinks that other cash fixed income instruments need a forward-looking term SOFR rate.

By when do you expect half of new floating rate note (FRN) issuance to be SOFR linked?

Our survey identifies some challenges in credit markets. Investors are hoping for an industry-wide solution for Libor-linked securities that does not provide for an automatic transition to SOFR. Absent that, there is a split of expectations across unilateral changes, tenders, exchanges and no action (effectively rendering the securities fixed rate). They would like to transition out of Libor the moment it is deemed unrepresentative, which may put additional pressure on the timeline.


Read the full report

Authorised clients of Barclays Investment Bank can log in to Barclays Live to read the full survey results.

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About the analysts

Amrut Nashikkar is a Director in the Fixed Income Strategy team at Barclays, based in New York. Amrut joined Barclays in 2008 from Lehman Brothers, where he was an interest rate strategist. Prior to that, he taught at New York University.

Joseph Abate is a senior member of the Barclays Fixed Income Research team based in New York, focusing on short-term dollar funding and money markets. In this role, he writes extensively on fed funds, Libor, regulation and liquidity. He has been ranked a top 3 analyst by the Institutional Investor All-America Fixed Income Research Team survey every year since 2010. Joe is also a member of the US Treasury's Office of Financial Research's Financial Research Advisory Committee, focusing on systemic risk.

Brian Monteleone is Head of US Investment Grade Credit Research and Head of Global Banks Credit Research at Barclays. He has senior coverage responsibility for US Banks and Finance Companies. For over five years, he has received top three rankings in the Institutional Investor All-America Fixed Income Research Survey, including #1 in Banks, #1 in Nonbank Financials and #3 in HY Financials for 2018.

Prior to his current role, Brian was based in London from 2009-11, with coverage responsibility for European insurance companies and stressed banks. He has been a financials credit analyst since 2003, beginning in New York at Citigroup (2003-06) and Lehman Brothers (2006-08), before joining Barclays.

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