Buy-side advance efforts in Libor transition

New data from the Investment Association reveals that 70% of asset managers reduced exposure to Libor in 2019.

Asset managers have upped efforts in the switch from the Libor benchmark before it is withdrawn at the end of 2021, according to new data from the Investment Association.

The buy-side trade association said investment firms have ramped up plans to move away from Libor to the Sonia (Sterling Overnight Index Average) benchmark, with a recent poll of Investment Association member firms showing that 70% had reduced their exposure to Libor throughout last year.

It also showed 65% already invested in Sonia-based instruments last year, and 75% had approved budget to complete the transition as planned. Around 25% of respondents had budgets related to the Libor transition of more than £2 million.

In January, the Bank of England, the UK’s Financial Conduct Authority and the Working Group on Sterling Risk-Free Reference Rates issued various documents and updated its roadmap, upon urging the industry to accelerate plans for the switch from Libor.

Describing 2020 as a ‘critical’ year for Libor transition, the update from UK authorities requested participants to cease issuance of cash products referencing Libor by the third quarter this year.

Market participants were also warned in March that the coronavirus pandemic could impact interim transition milestones of the move away from Libor. While the end of 2021 remains the target for firms to stop using the Libor benchmark, segments of the UK market, such as the loan market, have made less progress in the transition, the Bank of England said.

“Investment managers have made significant progress in the transition away from Libor to Sonia and other alternative reference rates,” said Galina Dimitrova, director for investment and capital markets at the Investment Association.

“With the FCA and Bank of England clear that Libor will cease to exist after the end of 2021, we strongly encourage investment managers, counterparties and vendors to work together in this final stretch to ensure a smooth transition, and reduce the reliance on LIBOR in all investments, operations and activities.”