ASIC: Time is running out for Asia’s bond markets to end LIBOR

  • By Elizabeth Fry

The corporate watchdog has warned the market against a passive approach to the transition away from the scandal-hit LIBOR as Asia gets ready to tackle US$190 billions of tough legacy bonds with 95 percent in Australia, Japan and China. 

Nathan Bourne, senior executive leader for markets infrastructure at ASIC called switching out of the interest rate benchmark to the risk-free rates, a significant priority. 

“There are significant risks associated with a failure to adequately prepare for the transition,” he said. 

Bourne was speaking at a webinar hosted jointly by Bloomberg and the International Capital Market Association to examine the current state of play with the so-called tough legacy issues facing Asia’s bond markets.  

This comes as markets phase out the use of LIBOR as a base rate for funding costs by the end of the year. All new contacts must use a risk-free rate from next year, but existing contracts have until mid-2003, the report noted. 

 In the report, Bloomberg and the ICMA warned that accelerated action was required by bond issuers to mitigate the potential for disruption in Asia’s bond markets as they switch from LIBOR to free risk rates. 

Big problem in Australia 

The report found that the tough legacy bond problem in Asia is significant with 80 percent having inadequate or no fallbacks in place at all. “The transition away from LIBOR will require issuers and investors to review their existing LIBOR-linked bond documentation to assess what kind of fallbacks they contain, and consider what actions need to be taken.”  

The report also said the issuance of new LIBOR-linked bonds is continuing in Asia in some cases without the recommended fallbacks in place.  

Bourne said the next six months will be challenging for the bond market. “However, we are seeing encouraging development from Libor jurisdictions. The US, UK, and European Union are set to have legislative processes for tough legacy contracts, and the sterling bond market has seen an increase in active transition from sterling LIBOR to the sterling overnight index average. 

Still, issuers have been slow to switch financial contracts out of the benchmark. 

“The cash market is moving at a much slower pace than the derivatives market for both amendment of existing LIBOR contracts and the adoption of new RFR products,” Bourne said, noting that the extension in US LIBOR has been welcomed by industry for this reason. 

He warned against a reliance on fallbacks and legislative solutions.  

"In Australia, ASIC’s view is that firms should, as soon as practicable, stop the sale and issuance of LIBOR-referenced contracts that expire after relevant cessation dates if they do not have robust fallback language and appropriate client communication. 

“More importantly, firms should completely cease offering new Libor products after 31 December 2021.” 

Currently, there are around $US225 trillion of derivatives, customer loans, corporate loans, and cash investments linked to the LIBOR benchmark. Globally, tough legacy bonds sit at US$854 billion.