Given the pervasiveness of LIBOR across financial markets, managing its removal has involved painstaking planning and preparation over many years. Thanks to the collaborative efforts of policymakers and market participants, most LIBOR settings were retired at the end of 2021 without major disruption. But with just over a year to go until five remaining US dollar LIBOR settings are scheduled to cease publication at the end of June 2023, it’s vital momentum is maintained to ensure successful completion of the transition.

These last five LIBOR settings were granted an additional 18 months to allow more of the huge volume of legacy transactions to run off naturally, but multiple regulators have stipulated that regulated entities in their jurisdictions should not enter new US dollar LIBOR transactions from the end of 2021, except in limited circumstances.

It’s clear real progress has been made since then. According to analysis by ISDA and Clarus, 47% of total cleared over-the-counter and exchange-traded US dollar interest rate derivatives DV01 in April involved SOFR – a record high. That compares with 25.3% in December last year.

Alongside the regulatory ‘no new LIBOR’ edict, a large driver of this uptick in volumes has been the SOFR First strategy implemented by the Commodity Futures Trading Commission’s Market Risk Advisory Committee. Introduced last year, this changed trading conventions in the interdealer market for linear US dollar swaps, cross-currency swaps and non-linear derivatives from LIBOR to SOFR.

As the end date for US dollar LIBOR approaches, it’s critical these transition efforts do not let up. In particular, we need to think about how to encourage participants in other market segments and geographies to switch from US dollar LIBOR as well. The exchange-traded market is one area where transition has been a little slower – although there have been  encouraging signs that this is changing. Initiatives like CME Group’s recently announced SOFR First for Options are intended to further bolster liquidity in exchange-traded options referenced to SOFR.

When preparing for the end of US dollar LIBOR, market participants can use the experience of the end-2021 deadline as a playbook for how to proceed. As well as using alternative reference rates for all new trades, a variety of tools are available to manage legacy exposures referenced to US dollar LIBOR.

For existing US dollar LIBOR-linked derivatives, ISDA’s fallbacks are likely to play an important role, just as they did for the other 30 LIBOR settings at the end of 2021. By automatically switching outstanding LIBOR derivatives to an adjusted version of the risk-free rate, fallbacks will provide a vital safety net for those trades that continue to reference LIBOR after June 30, 2023. The ISDA 2020 IBOR Fallbacks Protocol, which now has more than 15,200 adherents, remains open to any firms that have not yet have adhered.

The passing of US federal legislation in March completes another critical piece of the transition puzzle by fixing tough legacy contracts governed by US law. By allowing US dollar LIBOR in certain legacy contracts to be replaced with an alternative rate if no workable fallback exists, this legislation will go a long way to reducing the potential for systemic risk after end-June 2023.

At ISDA, we will continue our outreach and education initiatives to make sure market participants fully understand the tools that are available to them to prepare for the mid-2023 deadline. Next month, our popular Benchmark Strategies Forum series returns with two in-person events. We’ll be in New York on June 7 and London on June 22 – I very much hope you will join us.

Register for the Benchmark Strategies Forum in New York on June 7, or London on June 22.