1、Global Research30 April 2019 J.P.Morgan PerspectivesLeaving LIBOR:The Long Road AheadGlobal ResearchSee page 46 for analyst certification and important disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the f
2、irm may have a conflict of interest that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment US Fixed Income StrategyAlex RoeverACJ.P.Morgan Securities LLCEuropean Rates StrategyFabio BassiACJ.P.Morgan Securities plcJap
3、an Rates ResearchTakafumi YamawakiACJPMorgan Securities Japan Co.,Ltd.Chair of Global ResearchJoyce CJ.P.Morgan Securities LLCUS Fixed Income StrategyJoshua Younger ACJ.P.Morgan Securities LLCEuropean Rates StrategyFrancis DiamondACJ.P.Morgan Securities plcGlobal Credit ResearchStephen DulakeACJ.P.M
4、organ Securities LLCUS Fixed Income StrategyKimberly Harano ACJ.P.Morgan Securities LLCJ.P.Morgan Perspectives Leaving LIBOR:The Long Road Ahead 2Global ResearchJ.P.Morgan Perspectives30 April 2019Joyce Chang(1-212)834-Kimberly Harano(1-212)834- JPMorgan Chases approach to LIBOR transitionThe London
5、 Interbank Offered Rate(LIBOR)is set to be phased out by 2022,creating arguably the biggest challenge facing global finance today.Embedded in the plumbing of markets for over more than three decades,the benchmark is rooted in everything from consumer contracts to$190 trillion of USD interest rate de
6、rivatives.But post-crisis reforms altered market structure,prompting the Financial Conduct Authority(FCA)which is tasked with overseeing LIBORto say that what it seeks to measure is no longer sufficiently active.On a global level,international supervisory bodies such as the Financial Stability Board
7、(FSB)observed the same decline in activity in interbank short-term funding markets.Their conclusion:this decline constitutes a structural risk for unsecured benchmark interest rates.Taking into account other unsecured benchmark interest rates,$400 trillion of wholesale and consumer transactions glob
8、allycomprising a range of financial productsreference Interbank Offered Rates(IBORs).Without advanced planning for alternative benchmarks,a sudden cessation of these reference rates could massively disrupt floating-rate payments and receipts,posing a financial stability threat.As such,regulators and
9、 market participants across jurisdictions have been identifying alternative reference rates that are compliant with the International Organization of Securities Commissions(IOSCO)standards.JPMorgan Chase is at the forefront of finding robust alternatives to LIBOR,educating clients on this landmark t
10、ransition and providing liquidity in alternative reference rate products.JPMorgan Chase created a dedicated LIBOR Transition team in early 2018 that is far-reaching,leveraging expertise from all lines of business with dedicated working groups that span the globe.The Firms Chief Financial Officer and
11、 Chief Executive Officer of the Corporate Investment Bank oversee the program.When assessing risks associated with IBOR transition,the program considers three possible scenarios,including a disorderly transition.Plans to mitigate the risks have been identified,with some already in motion.Model risk,
12、for example,will be mitigated by the identification and migration of swap curves based on IBORs to new alternative reference rates.JPMorgan Chase is also heavily involved with public sector National Working Groups,which include the Alternative Reference Rates Committee(ARRC)in the US and the Working
13、 Group on Sterling Risk-Free Reference Rates in the United Kingdom,to help the transition efforts to alternative benchmarks such as the Secured Overnight Financing Rate(SOFR)in the US and Sterling Overnight Index Average(SONIA)in the UK.Moving from LIBOR to alternative reference rates is a massive l
14、ift requiring multiple pieces to converge.From a market perspective,fresh debt linked to the new reference rate must be issued,and futures and swaps markets need to grow.Subsequent upgrades to technology will then be required to process products linked to the new benchmarks.At the same time,legal te
15、ams need to mobilize to address trillions of dollars of contracts tied to LIBOR.So-called fallback languagea legal mechanism in contracts to provide a back-up planwas written under the assumption that any interruptions in the publication of LIBOR would be temporary.JPMorgan Chase is drawing on its b
16、est in class professionals to provide thought leadership and solutions to customers through a firm-wide effort combining business and market activity with internal education.We encourage clients to actively participate in public consultations and follow developments in order to ensure the broadest p
17、ossible industry engagement.As one of the largest fixed-income dealers,we are committed to supporting clients.Our public finance team spearheaded the first-ever municipal bond deal using SOFR in the US with the Triborough Bridge and Tunnel Authorityan affiliate of the Metropolitan Transportation Aut
18、hority(MTA)in the New York area.We have also issued SOFR debt and are nurturing derivatives in alternative rates.The Firm continues to develop and implement plans to appropriately mitigate the risks associated with IBOR discontinuation,but more importantly we are here to support the market and engag
19、e our customers during this historic transition.ChristopherPalmer,Head of the LIBOR Transition Team,J.P.Morgan*Not a member of J.P.Morgan Global Research3Global ResearchJ.P.Morgan Perspectives30 April 2019Joyce Chang(1-212)834- Table of ContentsExecutive Summary.4Leaving LIBOR:The Long Road Ahead.5L
20、IBOR:Frequently Asked Questions.10LIBOR Reform Timeline.14Status of Benchmark ReformUS.15Euro Area.19UK.25Switzerland.28Japan.30Australia.33Implications for BanksUS Banks.35European Banks.40EM Asia Banks.43Appendix.44Contributing AuthorsUS Fixed Income StrategyTeresa C HJ.P.Morgan Securities LLCHenr
21、y St JJ.P.Morgan Securities LLCJapan Rates ResearchShumpei Kobayashi JPMorgan Securities Japan Co.,Ltd.European Rates Strategy Antoine Gaveau,CFAJ.P.Morgan Securities plcKhagendra GJ.P.Morgan Securities plcSampath VJ.P.Morgan Securities plcGlobal Emerging Markets ResearchAmy Ho J.P.Morgan Securities
22、 LLCGlobal Credit ResearchEuropean Banks Axel FJ.P.Morgan Securities plcRoberto HJ.P.Morgan Securities plcDrishti SJ.P.Morgan Securities plcAsian Banks Matthew HJ.P.Morgan Securities(Asia Pacific)LimitedUS BanksKabir Caprihan J.P.Morgan Securities LLCGilead SJ.P.Morgan Securities LLC4Global Research
23、J.P.Morgan Perspectives30 April 2019Joyce Chang(1-212)834- Executive SummaryOverviewJ.P.Morgan researchers across fixed income asset classes examine the rationale,policy and market responses and risks ahead to the implementation of interest rate benchmark reform as the move from LIBOR to new replace
24、ment reference rates advances globally.Rationale for Benchmark Interest Rate ReformInterest rate benchmark reform has been driven by the post-Global Financial Crisis(GFC)decline of the underlying market that LIBOR seeks to measure,as the reduced size of the market feeding into LIBOR submissions has
25、contributed to structuralweaknesses in the calculation.Policy and Market Responses around the GlobeBenchmark reform in the US is a reality with SOFR passing its one-year anniversary.Average daily trade volumes of the SOFR index components are regularly in excess of$900bn,or more than 1800 x the aver
26、age daily unsecured bank trades underlying USD LIBOR tenors.Activity in SOFR futures and floating rate notes(FRNs)continues to build,facilitating the growth of OTC swap markets.There is a possibility that the Fed may shift from targeting the Fed funds rate to targeting SOFR,hastening the transition.
27、The reform process for GBP is advancing with SONIA established as the risk-free rate for the UK in April 2017 and gaining a steady increase in OTC derivative and exchange traded futures.The Euro area is lagging,with the ECB launch of risk-free benchmark rate STR slated for October 2019,while Euribor
28、 will likely be alive longer than other LIBOR rates.TONAR,also known as the JPY uncollateralized overnight call rate,will be used as the risk-free rate in Japan but implementation will not begin until 2H19.LIBOR,in its current form,will probably cease to exist after 2021 as regulators will no longer
29、 compel banks to provide quotes.Challenges Ahead:Future Risks to MonitorTerm reference rates still need to be developed since the new reference rates are overnight rates;the market needs to model a term structurealso known as a yield curvewith different maturities to reflect expectations about where
30、 interest rates will be in the future.There is some support for a“two-benchmark”approach to capture banks marginal term funding costs,while the ICE Benchmark Administration(IBA)the administrator for LIBORannounced that it is working on its own potential alternative benchmark to LIBOR,known as the US
31、 Dollar ICE Bank Yield Index(BYI)to reflect wholesale unsecured bank funding costs.US banks started issuing debt tied to SOFR,but European and Asian banks are lagging.Fallback provisions for contracts tied to LIBOR are not yet consistent,and there is no uniform approach for adoption across fixed inc
32、ome markets.5Global ResearchJ.P.Morgan Perspectives30 April 2019Joyce Chang(1-212)834-Kimberly Harano(1-212)834- Leaving LIBOR:The Long Road AheadOne decade after the GFC,interest rate benchmark reformthe move from LIBOR to new replacement reference ratesis advancing globally.LIBOR,in its current fo
33、rm,will probably cease to exist after 2021 as regulators will no longer compel banks to provide quotes.Benchmark reform in the US is moving faster than expected since the April 2018 launch of SOFR;average daily trade volumes of the index components are regularly in excess of$900bn,or more than 1800
34、x the average daily unsecured bank trades underlying USD LIBOR tenors.Activity in SOFR futures and FRNs continues to build,facilitating the growth of OTC swap markets.There is a possibility that the Fed may shift from targeting the Fed funds rate to targeting SOFR,hastening the transition.Challenges
35、 remain for SOFR,including establishing term SOFR rates,advocates for a“two-benchmark”approach,inconsistent fallback provisions for contracts tied to LIBOR,and no uniform approach across fixed income markets.The reform process for GBP is more advanced than in Europe and Japan with SONIA established
36、as the risk-free rate for the UK in April 2017 and gaining a steady increase in OTC derivative and exchange traded futures.The ECB launch of the new risk-free benchmark rate STR is slated for October 2019,while Euribor will likely be alive longer than other IBOR rates.TONAR,also known as the JPY unc
37、ollateralized overnight call rate,will be used as the risk-free rate in Japan but implementation will not begin until 2H 2019.US banks started issuing debt tied to SOFR,but European and Asian banks are lagging.New interest rate benchmarks replacing LIBOR become realityA decade after the Global Finan
38、cial Crisis(GFC),we examine the rationale,policy and market responses,and risks ahead to the implementation of interest rate benchmark reform.Just as the Federal Reserves upcoming review highlights that the process of monetary policy innovation is not over,interest rate benchmark reform and the tran
39、sition away from the London Interbank Offered Rate(LIBOR)marches onward in the US and globally.Since 2014,reforms have been in motion to replace LIBOR with more robust benchmarks with the goal to complete the transition of LIBOR-dependent markets to the new benchmark before 2022.In the US,the new be
40、nchmark,the Secured Overnight FinancingRate(SOFR)has just passed its one-year anniversary,after officially launching on April 3,2018.Other regions are lagging the US,but the reform process for GBP is at a more advanced stage than in Europe and Japan,which are moving more slowly.Our fixed income stra
41、tegists and bank analysts assess the current state of play for interest rate benchmark reform across the developed markets.We include a section that reviews the basics of LIBOR and background information on why it needs to be reformed(Amy Ho).We outline the new reference rate for each region,assessi
42、ng its current adoption and the benchmark transition plan,and end with a discussion of global financial stability risks.6Global ResearchJ.P.Morgan Perspectives30 April 2019Joyce Chang(1-212)834-Kimberly Harano(1-212)834- Interest rate benchmark reform driven by post-GFC decline of underlying market
43、that LIBOR seeks to measureThe transition away from LIBOR traces back to the 2008 GFC when investigations into benchmark manipulation were launched against LIBOR panel banks responsible for submissions used to calculate the reference rate(see Ten Years after the Global Financial Crisis:A Changed Wor
44、ld,Chang,Loeys et al,September 10,2018).Beginning in 2009,regulators and public authorities in multiple jurisdictions(including the US,CA,JP,CH and the EU)investigated a number of institutions for alleged misconduct related to LIBOR and other benchmarks,including Euribor(Euro Inter-Bank Offered Rate
45、)and TIBOR(Tokyo Inter-Bank Offered Rate).In 2012,following the first major settlements concerning banks LIBOR submissions,regulators and policymakers undertook a review of financial benchmarks that resulted in greater oversight and governance and a call for new benchmarks.When LIBOR was conceived 5
46、0 years ago and officially embraced by the British Bankers Association in 1986,few could have predicted the scale and range of financial products and contracts for wholesale and consumer activities that would reference LIBOR.The BIS estimates that$400tn of global assets reference LIBOR.By comparison
47、,the submissions from USD LIBOR panel banks are currently based on$500mn or less of daily transaction volume as actual transactions have fallen,raising questions about LIBORs accuracy as a real-time reflection of funding levels.After Lehman Brothers failed,banks and regulators came to recognize the
48、risks associated with the unsecured borrowing and lending transactions that support LIBOR submissions.As unsecured borrowing transactions between banks declined in the aftermath of the GFC,reducing the size of the underlying market feeding into LIBOR submissions,the Financial Stability Board(FSB)con
49、cluded that there were structural weaknesses in the calculation of reference rates that play a crucial role in various financial markets and that unreliable interest rate benchmarks are a financial stability issue.In 2014,the FSB published a set of recommendations to replace LIBOR with more reliable
50、 indices,based on nearly risk-free-rates(RFRs)anchored in actual transactions in deep and liquid markets.On February 7,2019,LIBOR experienced its largest one-day drop since 2009,falling by 4bp overnight with no prior indications that it would decline so much,substantiating concerns that LIBOR has no
