LIBOR Is Gone: Why Its Fallbacks Still Move FX Prices Today

A transition that never quite finished

Most people in markets have heard the headline: LIBOR is over. It is. The one-week and two-month US dollar settings stopped after December 2021, and the remaining dollar tenors stopped being published on a representative basis after 30 June 2023. That much is factual and settled. But "over" is doing a lot of work in that sentence. The contracts, the spread adjustments, the fallback formulas and the risk that sits behind them did not disappear; they moved into new plumbing. And those pipes still carry FX pricing. This is the endgame nobody talks about, because there is no dramatic date to circle in the calendar.

First, the plain-English bit: forward points and the basis

An FX swap is a simple idea dressed in formal clothes. Two parties swap currencies today and agree to swap them back later at a pre-set rate. That difference between today's rate and the later rate is quoted as forward points, meaning the number of pips by which the future exchange rate differs from spot. A cross-currency swap is the longer-term cousin, typically running beyond one year, where the two sides also exchange interest payments along the way.

Textbook finance says the forward points should equal the interest rate difference between the two currencies — a condition called covered interest parity, or CIP. When it holds, hedging away your currency risk costs you exactly the rate difference and nothing more. When it fails, you start paying a premium that has nothing to do with interest rates and everything to do with balance sheet costs, liquidity and demand. The BIS described this precisely: banks passing on the cost of taking the other side of FX hedging demand as wider forward points than parity warrants. The dollar tends to command a premium in these trades, which is a polite way of saying it is expensive to hedge into.

The basis is the gap that survives when you do the cross-currency swap version of the same trade. It is the extra bit one side pays on top of the reference rate to borrow the corresponding currency. So the reference rate matters — which is where benchmark reform walks back in.

Where the fallbacks bite

The old cross-currency basis swap was priced as "Libor plus a basis." The ISDA fallbacks replaced that reference with the relevant risk-free rate compounded in arrears — for dollar contracts, SOFR — plus a spread adjustment. That adjustment wasn't plucked from the air. ISDA determined it using a historical median approach over a five-year lookback from the date of the cessation announcement, and the spreads were locked in when the UK's Financial Conduct Authority announced the timetable in March 2021. In other words, the number stopped moving. It is now a fixed constant in a contract that otherwise floats.

That fixed spread is deliberately designed to make the fallback economically comparable to the old benchmark: LIBOR carried a credit risk premium and term premia that SOFR does not. But "comparable" is not "identical." Different leg conventions — compounded in arrears versus a forward-looking term rate, different observation periods, different day-count mechanics — shift where cash actually lands on the payment date. If you want a slightly unsettling thought with your chai: the most important number in some of these contracts is a constant agreed years ago, quietly behaving like a well-behaved ghost.

Term SOFR, and the honesty about certainty

For dollar contracts that want a forward-looking rate, the practical answer is CME Term SOFR, which the ARRC recommended in July 2021 in tenors of one, three, six and twelve months. It exists, it is published, and it is used. But there is a real subtlety here worth being plain about: liquidity in the SOFR derivatives market that underpins forward pricing is uneven. The core of the market is very heavily traded: CME reported a record average of 5.4 million SOFR futures and options contracts a day in 2025. But that depth does not reach every contract. One technical study, whose worked examples use 2023 and 2024 data, notes bid-ask spreads and limited liquidity, and that many listed SOFR options have essentially no liquidity at all. Where a contract is that thin, the neat no-arbitrage arguments weaken, and offered prices start to reflect the subjective views and hedging costs of whoever is quoting.

This is not a scandal. It is an honest description of a market that is deep at its core and thin at its edges, and it means a forward-looking rate assumption that leans on those thin contracts carries real uncertainty. Anyone claiming otherwise has either not read the details or is selling something.

Forward curves are prices, not prophecies

Here is the most practically important point: a forward curve shows what the market currently pays to fix a rate for a future period. It is not a forecast. One structured-finance practitioner tells a concrete story about this. In spring 2021, SOFR sat near all-time lows, and forward pricing implied it would be around 0.65% by 2023. A borrower on a SOFR + 2.50% loan might reasonably have underwritten to about 3.15%. By the time 2023 arrived, SOFR was around 5.30%, so the same loan cost roughly 7.80%. On a $10 million, 30-year loan, the annual payment difference between those two rates ran to the hundreds of thousands of dollars — enough to turn a comfortable debt-service cushion into a shortfall. The lesson is not that the curve was malicious. It is that it is a market price, not a promise.

The cross-currency referee

Because forward points are set by actual swap and cross-currency transactions rather than a tidy formula, the reference rate inside those contracts is a referee with a whistle. When LIBOR was removed and replaced by a risk-free rate plus a fixed spread, the arbitrage relationships that once pinned forward prices to interest differentials were nudged. When hedging demand for dollars is heavy, banks pass the balance-sheet cost through into wider forward points. Liquidity can also vanish, bid-ask spreads widen, and the gap between the two currencies' funding costs no longer behaves like a clean number. The fallback does not simply plug a hole — it changes what the referee is watching.

The variation across currencies adds another layer. Sterling contracts reference SONIA; euro contracts reference EURIBOR or a euro risk-free rate depending on the contract's terms. Each carries its own spread adjustment and its own conventions. A cross-currency trade between two of them therefore deals with two sets of fallback mechanics and a single forward point. This is the sort of thing that looks simple on a term sheet and complicated once you try to model it. The term "tough legacy" contracts is worth knowing; those are the ones with no adequate fallback clause, which authorities addressed by statute and rule in the final years of the transition. But even for well-drafted contracts, the basis still behaves with a mind of its own.

What to take from this

Three things are worth holding loosely. First, "finished" is the wrong word for benchmark reform; the reform deadline passed, but its arithmetic is embedded in live contracts and pricing. Second, forward points and cross-currency basis are where you see the market's actual balance-sheet cost of hedging, not where you see the future. Third, the fallback spreads were designed to keep things broadly neutral, and ISDA's stated goal was economic indifference — but "broadly neutral" is not a guarantee of neutrality for any single currency pair on any single day.

Jurisdiction matters here, too. The LIBOR Act and the Federal Reserve's Regulation ZZ handled US dollar tough legacy contracts; other jurisdictions took their own paths with their own statutes. The conventions in a cross-currency swap depend on which legal framework the contract sits in. That is not a reason to panic; it is a reason to read the confirmation rather than assume.

If there is a broad lesson in the endgame, it is this: reforming a benchmark is partly a technical exercise and partly an act of trust. The rates changed; the plumbing was re-laid; the trades kept flowing. The basis, meanwhile, kept being the basis — a number that is never quite the one you expected, and always worth watching rather than assuming.