Beware of cliff edge in Libor fallbacks

Derivatives users may see a sudden change in the value of payoffs when Libor ends, Coremont analysts write

Danger-Libor-cliff-edge

Everyone knows it’s happening, but nobody knows exactly when – or how.

The Libor benchmark is going away, but the precise date and timing of its discontinuation is still uncertain. Best guesses are that the rate will cease publishing at the end of 2021 or in early 2022.

Once Libor ends, financial contracts referencing the rate will rely on any fallback clauses they contain. Most derivatives will use fallback language developed by the International Swaps and Derivatives Association. The clauses

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