Libor replacement jumble may hike hedging costs

Use of term rates and credit adjustments will create new basis risks that could be costly to hedge

Loan issuers are being urged to stick with standard Libor replacements and avoid the use of forward-looking term rates and credit spread adjustments, which may splinter the market and create new basis risks that could be costly to manage.   

“If such consistency is achievable it would also have the potential to reduce complexity with regard to internal risk management practices and hedging purposes,” said Mikael Stenstrom, senior adviser on market operations at the European Central Bank.

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