LIBOR Alternative Rates: The Future of OTC Derivatives Pricing and Curve Construction

LIBOR might never officially go away, but after the end of 2021 the FCA will no longer compel banks to use LIBOR as the benchmark for short-term interest rates in the interbank market. While it will be up to the panel banks to decide LIBOR’s future, it is generally advisable for market participants to also consider alternative rates.

What happens to LIBOR-based products should LIBOR no longer be available? And how will LIBOR alternative rates impact derivatives valuations and curve construction practices going forward?

In this paper, we discuss these issues and the preparations derivatives market participants should consider to ensure a smooth transition between now and 2021.

This paper examines:

• How to approach new derivatives contracts issued between now and 2021
• The transition for legacy contracts; fallback provisions in the event that LIBOR is unavailable
• The emergence of new curve construction approaches as instruments begin referencing alternative rates