Is the Australian Financial industry ready for the “big switch”?

In July 2017 FCA announced that starting 2022, it would no longer monitor or seek submission of LIBOR rates from the panel banks and therefore, market participants must prepare for alternate reference rates for the purpose thereof.

Back home in Australia, the Australian Securities and Investments Commission (ASIC) recently sought inputs from the financial market players to take stock of their readiness in incorporating replacement benchmark of LIBOR (London Interbank Offered Rate).

It is estimated that LIBOR as global interest rate benchmarks are still embedded in contracts worldwide to the tune of hundreds of trillions of US Dollars. Major players that rely upon LIBOR are Banks, Asset Managers, Insurers as well as corporates around the world. The financial instruments that underpin it as underlying reference are mortgages, bonds, corporate loans and derivatives.
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While volume is just one aspect, the complexity in steering away from LIBOR also lies in the fact that the benchmark, being only an underlying reference rate, makes it harder to assess with certainty the aggregated sums to which a firm is exposed to it. Although transitions from LIBOR to transaction-based alternative reference rates have already started picking up pace in recent years, experts have expressed concerns about complete preparedness of the market, when the sun sets on the usage of the benchmark rate with the end of 2021.

Read on to find out what makes LIBOR the most important reference rate in the world, the reasons behind FCA's decision to pull the plug on it and how the affected nations including Australia should work towards addressing the switch over to alternative rates.​