More than two years into the SOFR regime, it’s not really going all that well. Adoption remains, shall we say, questionable and uncertain even though, everyone says, LIBOR is on its way out and the Secured Overnight Financing Rate is the future. Jumbled together by the Fed’s New York branch, the latter is, we are told, superior in every conceivable way.
Tell that to Chicago. Over on the CME, what you find in actual trading is no discernable decline in eurodollar futures volume and open interest. Authorities worldwide are serious about putting the kibosh on LIBOR, and yet the market operates business-as-usual. Eurodollar futures are settled in 3-month LIBOR.
Combined open interest in SOFR futures hasn’t once registered more than 600,000 (though the number is rising). There’s 1.5 million contracts open in March 2020 eurodollars alone.
This was supposed to be the year to begin the weaning. Having made plain their stance, regulators were expecting the banking system to just listen and obey. Instead, the apathy has forced authorities to become the equivalent of a frustrated parent raising their voice in the direction of an unruly child.
UK financial regulators have stepped up warnings to major banks and insurers to sever their links with Libor, as part of a growing push to meet a 2021 deadline for moving away from the notorious benchmark.
The Bank of England and Financial Conduct Authority put senior managers of firms on notice on Thursday that it is demanding to see “clear evidence of engagement” from next month that they are ending their Libor addiction, to make sure the switch from the scandal-tainted rate happens by the end of next year, when the benchmark should cease to exist. Regulators told firms that cash products linked to sterling-denominated Libor must cease by September.
What’s the big deal with LIBOR? It’s actually two big deals, both of them truly important elements in understanding our great predicament.
The first is with LIBOR itself, the main complaint. Scandal. Bank manipulations. At least that’s what they say.
Their real beef with this short-term rate index is something altogether different, about what it represents. Offshore money.
That’s what eurodollars are, after all, and LIBOR is the eurodollar rate. As I wrote last year, it is a constant reminder that all is not as it seems in the monetary realm. It’s an enormous and dizzyingly complex zoo spread out over all sorts of boundaries not just geography.
This gets right to the heart of the matter. Is the Federal Reserve responsible for only banks operating in the United States? Or, does the central bank owe responsibility to the currency? The dollar works well enough here domestically, but it’s the eurodollar that keeps pulling the world into repeated trouble.
The very fact that there is a eurodollar rate is a thorn in the official side. This explains all the fuss, how what didn’t amount to all that much had still been called The Crime of the Century when all the fuss was being made in 2012 as the global economy careened into the second crisis.
One that LIBOR and eurodollar futures signaled well in advance against the position of central bankers.
Congressman Scott Garrett would point out the Fed Chairman’s obvious inconsistency on the matter.
You [Bernanke] have been before this committee countless numbers of times since 2008 and if this is the crime of the century, as so many people are reporting today, never once did you ever once come and mention it as being a problem, never once did you come here and say this is what you’re going to do about it.
A totally independent money rate linked specifically to the global offshore dollar markets that don’t officially exist, and certainly don’t fall under the Fed’s regulatory mandates which stop at the US border. No wonder it sounds like a personal vendetta, LIBOR shows directly how the monetary situation worldwide is far, far more complicated.
Central bankers want and need you to believe everything is so simple. How they’ve got it all covered and it’s all so easy. The LIBOR scandal was the perfect excuse to act.
The other issue with LIBOR, as it pertains to the lack of movement away from it, is a similar reminder about the big picture. If the Fed hates LIBOR because of how it might prompt everyone to realize what is the real global reserve currency, the reluctance of banks to migrate out of it demonstrates why the eurodollar remains king more than a dozen years after it fractured.
I really shouldn’t be, but I’m often astounded by how little appreciation there is for what a global reserve currency actually is. Mostly, it seems, people think it has something to do with oil prices. Others point to something like SWIFT.
Those are only where it begins; or ends, depending upon your perspective. The real issue with LIBOR is really about what makes a reserve currency a reserve currency; the depth of infrastructure and participation that has to go on even if totally unappreciated by authorities who claim to know what they’re talking about.
In order to have any chance of having and redistributing “enough” of that currency, you need all these things in place behind it.
It’s why the world de-dollarizes only by default, not because of some master Chinese plan which its proponents tell us every year is right then being finalized. It doesn’t work like that. You want to replace the dollar, fine, but you better have everything up and running behind the scenes first; and that’s a much, much bigger task than everyone seems to believe.
Furthermore, it’s not the denomination which is the problem.
As I wrote also last year also pertaining to the problems regulators were running into with LIBOR:
There’s an unthinkably complex and consuming infrastructure that makes up credit-based money. Then a whole lot more putting it offshore. It doesn’t just get switched on and off by fiat (pun intended). This is what the de-dollar protesters never consider – even if Zhou Xiaochuan did.
If regulators run into such reluctance for just a reference and benchmark pricing rate, how does anyone think they are going to replace the eurodollar as world reserve currency?
Again, good luck dethroning the eurodollar. And I mean that in all sincerity. It doesn’t really work, even if it does minimally keep the lights on.
But because it’s a huge chore that no one is remotely prepared to undertake, there’s just no alternative to it. Not a realistic one no matter how many times we hear about countries “diversifying their reserves.”
If the global banking system doesn’t want to give up LIBOR…
And since authorities everywhere would rather sweep the offshore funding markets under the rug rather than tackle its massive problems head on, no chance of fixing it, either. They’ll try to kill LIBOR and therefore any upfront mention of the vastness of the real monetary zoo in order to replace it with government-approved alternatives that give the public the false impression that all monetary matters are safely tucked away under its comprehensive umbrella.
Which one really was the Crime of the Century?
Eliminating LIBOR doesn’t do justice for it, rather it’s part of the cover-up.