Global Libor Transition Has Reshaped Trading, Hedging, BIS Says

The global transition away from the London interbank offered rate led to structural changes in over-the-counter interest rate derivatives markets, according to the Bank for International Settlements quarterly review published Monday.

• “The transition from Libor to ‘nearly risk-free’ rates has led to structural changes that have reshaped the trading and hedging behaviour of participants in fixed income markets,” BIS’s Wenqian Huang and Karamfil Todorov wrote
• Libor transition “fundamentally changed both fixing risk and basis risk,” primarily because use of risk free rates (RFRs) reduced fixing risk significantly
  • As floating coupons in RFR-based swaps capture daily realization of overnight rates, they ...