Cunningham Says Keep LIBOR Prime
Federated Investors' latest "Month in Cash," entitled, "Libor's long goodbye," tells us, "If any field operates better under a deadline, it's the financial industry. That may be the reasoning behind the Financial Conduct Authority's announcement late in July of a time frame for phasing out the London interbank offered rate (Libor). The catch is that the date is so far out (year-end 2021) to be much of an immediate incentive. It points to that other near-given when it comes to the financial sphere: change takes a long time to implement. For reference, remind yourself of money market reform!" Federated's Deborah Cunningham explains, "We have known Libor's time was numbered for some time now. The long time frame until its termination reflects the ongoing debate about what the replacement should be. We expect the solution will come from the same regulator, but others have been pushing for a rate based off Treasury repo and other options. It is now time to cease arguing about pluses and minuses of various replacements and put forth effort to decide on one and work to fine-tune it. As far as cash managers are concerned, the issue mostly concerns floating-rate securities, which use Libor for price. But it is not just us. From a broader market perspective all sorts of derivatives -- swaps, puts, calls -- hinge on the rate, or on the spread between Libors of differing maturities." She adds, "We think the ultimate solution for a replacement will vary according to what will work best for each portion of the market and the types of securities used. The replacements don't all have to be the same. We would caution against using Treasuries as a benchmark, however, because they are flight-to-quality securities often moving due to global developments. You want to use a measure that is mostly dependent on market conditions. Bottom line for us is that our cash products are not immediately affected by the announcement and any adjustment down the line won’t be disruptive."
