Financial authorities in the UK have teamed up to urge market participants to accelerate efforts to transition away from the Libor benchmark this year, before it is axed at the end of 2021.
The Bank of England, the Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have issued various documents and updated its roadmap for the shift towards the Sonia (Sterling Overnight Index Average) benchmark.
Describing 2020 as a ‘critical’ year for Libor transition, the latest measures from the authorities request that participants cease issuance of cash products referencing Libor by the third quarter this year, with market makers urged to switch the convention for sterling interest rate swaps from Libor to Sonia on 2 March.
“The time to act is now: with the tools published today and the support of the official sector domestically and internationally, market participants have what they need to leave Libor behind,” a statement from the Bank of England, the FCA and the RFRWG said.
The controversial Libor benchmark is being phased out following years of scandal, alleged manipulation and a decline in activity, and will be replaced with Sonia by the end of 2021. Twenty major banks agreed to continue making submissions to Libor until then to ensure a smooth transition as the benchmark was phased out.
Research and studies have suggested that the buy-side is largely unprepared for the shift from Libor, with one study early last year stating that a significant 75% of asset managers still have contracts which reference Libor and a life span beyond the 2021 deadline. The volume-weighted proportion of interest derivatives referencing Libor that go beyond that date at the time the study was published was thought to be around 40%.
“In most products, market participants have made impressive progress in moving away from LIBOR. The time has come to draw to a close its remaining use,” Christopher Wooolard, executive director of strategy and competition at the FCA, commented. “The Bank and the FCA have written to major banks and insurers to set out our expectations for transition progress during 2020… Firms must act now to help meet these targets and ensure a smooth transition to alternative rates by end-2021.”
The FCA added that the market for Sonia derivatives is already well-established, with average cleared over the counter Sonia swaps exceeding £4.5trillion each month over the past six months. The traded monthly notional value is also now broadly equivalent to Sterling Libor.