Libor-in-arrears swaps face unwinds on benchmark death
Backward-looking fallbacks are incompatible with the product, which relies on forward rates
The death of Libor could result in the forced unwind of so-called Libor-in-arrears swaps, which require a forward rate to settle. That is likely to happen if Libor – a forward-looking benchmark – is replaced with a backward-looking fallback rate for swaps straddling the pre- and post-Libor worlds.
“A Libor-in-arrears swap without a forward-looking fixing would be impossible. The best thing to do would be to somehow try and unwind them,” says a rates trader at a European bank.
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