Index Providers Move Away From LIBOR

Several of the larger index providers have published consultations or other publications about removing IBORs from their indices. A number of indices, particularly those with a volatility or risk control theme, have a "cash" element, typically three-month USD LIBOR. Some of the index methodologies for these types of indices have LIBOR fallback provisions to a replacement rate, while others would have to be amended to change out the USD LIBOR component.

Each of S&P Dow Jones Indices LLC ("S&P"), MSCI Inc. and IHS Markit, published consultations requesting feedback from market participants on an appropriate replacement rate. Wherever an IBOR was used in an index, the relevant risk-free replacement rate was suggested as an alternative. For example, the SOFR was the suggested replacement for USD LIBOR, while the Euro Short-Term Rate ("ESTR") was suggested as a replacement for EURIBOR. The desirability of a forward-looking risk-free term rate was expressed in these consultations as a replacement for a similar tenor of the IBOR, while it was noted in at least one publication that daily SOFR would be a suitable replacement for overnight USD LIBOR.¹

Since these original publications, MSCI announced on August 19, 2021 that it has amended eleven methodologies to replace LIBOR and EONIA in the MSCI indices. S&P issued a further consultation on July 28, 2021, in which it sought further market feedback and also stated that the IBOR replacements would be effective as of the October 2021 rebalancing. In that consultation, S&P stated that USD LIBOR would be replaced with SOFR, overnight and term.

Footnote

1. See generally S&P Dow Jones Indices FAQ LIBOR Transition (Mar. 2021) at: FAQ: LIBOR Transition (spglobal.com); S&P Dow Jones Indices' Consultation on Potential Replacement Rates for Key London Interbank Offered Rates – Updated (July 28, 2021) at: https://bit.ly/3CsJCPu; Consultation on the Potential Replacement Rates for LIBOR and EONIA in the MSCI Indexes (Dec. 2020) at: PowerPoint Presentation (msci.com); and IHS Markit – Findings and Request for Feedback (Jul. 2020) at: https://bit.ly/3GvxAau.

Originally published in REVERSEinquiries: Volume 4, Issue 5.
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