(Bloomberg) -- Purging Libor from the financial system is proving no easy task.For more than three years, regulators have steadfastly maintained that the beleaguered London interbank offered rate would be phased out at the end of 2021. On Monday, they abruptly gave ground and pushed back the date of dollar Libor’s anticipated demise by 18 months.A decision to shift course may have been expected by some, but few anticipated such a long extension. And while officials are adamant that it’s only a temporary lifeline, many see the move as a stunning acknowledgment that the task has been more daunting than envisaged.At the heart of the delay is the threat to financial stability posed by trillions of dollars of existing contracts and instruments that lack a clear replacement rate. Policy makers have struggled to find a solution to the issue, which stretches across numerous markets.“Libor dependencies are still entrenched in the DNA of the financial system, which could point to systemic risks if the transition is rushed,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA.‘Huge Backlog’While waiting until 2023 to end key Libor tenors doesn’t solve the problem of so-called legacy contracts, a senior Federal Reserve official said it should at least allow for many to expire naturally, especially as policy makers discourage new Libor-linked deals beyond the end of next year.“This process is just massive because of all the legacy contracts that are hanging out there,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings. “There’s a huge backlog of them that weren’t going to unwind in a very easy fashion.”Monday’s decision fueled a rally in eurodollar futures, which are linked to Libor, with traders repositioning for a lower spread adjustment in fallback calculations during the transition.Breathing SpaceThe delay undoubtedly comes as a welcome reprieve to many of the world’s largest banks, which have struggled to transition certain markets to the Secured Overnight Financing Rate, the Fed-backed Alternative Reference Rates Committee’s preferred Libor replacement.Near the center of the problem is a pile of outstanding debt that can’t be easily amended to include contractual fallback language -- which will therefore struggle to transition. That’s got officials and market watchers warning to a potential wave of litigation if a solution can’t be found.“The key takeaway is that the extension will give regulators more time to facilitate an orderly transition away from Libor in cash instruments such as securities and loans,” said Scott Buchta, head of fixed-income strategy at Brean Capital. “The big issue here is the lack of uniform fallback language.”Regulators had been vocal in recent months that the transition was still on track, highlighting recent milestones including the shift by derivative exchanges to SOFR for calculating the value swaps.More recently, the International Swaps and Derivatives Association unveiled a much anticipated legal protocol to help convert Libor-linked contracts to SOFR once the benchmark expires.Yet despite the progress, measures to shift existing cash instruments -- such as floating-rate bonds -- away from Libor have proven difficult. Efforts to get lawmakers to support legislation that would impose a fallback benchmark on financial products that lack a viable replacement rate have so far fallen flat.And as the coronavirus spread the transition began to lose momentum.Both the U.S. and U.K. governments allowed Libor to be referenced as part of emergency loan programs to help keep businesses afloat during the pandemic. The Bank of England delayed plans to encourage banks to ditch the rate and the U.K. pushed back a deadline for lenders to cease issuing Libor-linked contracts.Unsafe, UnsoundA senior Fed official made clear Monday that writing new Libor contracts would be seen as unsafe and unsound banking practice if continued beyond the end of 2021, and that the central bank would supervise such firms accordingly. Lawyers say banks should be on guard for tougher regulation.The Fed “used language designed to engender fear in the banks,” said Michele Navazio, a partner at law firm Seward & Kissel LLP. “That is regulatory speak for we want you to transition.”The Fed, in a joint statement Monday with the the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, encouraged banks to cease entering into Libor-referenced securities as soon as practicable.“It’s not like it has been a disaster and nobody has started switching over,” said Scott Skyrm, executive vice president of Curvature Securities. “It’s just there’s still a lot of work to do. The market is going in the right direction with activity in SOFR picking up, it just needs more time.”(Adds eurodollar futures in the eighth paragraph, and comment from Seward & Kissel in the third paragraph from the bottom.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.