‘Last orders’ called on Libor benchmark

The Bank of England’s deputy governor for markets and banking has said pace of transition from Libor to Sonia must be accelerated.

Banks have been told to stop adding to their Libor exposures by the Bank of England this week as the institution’s deputy governor for markets and banking called time on the benchmark during an event in London.  

Speaking to delegates at a Libor-focused event, Dave Ramsden stated that there has been positive progress in the transition from Libor to Sonia, but the pace of progress needs to accelerate and there is much more to be done.

“The time for ‘last orders’ is now,” Ramsden said. “Firms need to be focused on what they need to do to be able to transact Sonia-based products; and stop adding to their post-2021 Libor exposures. There is a growing recognition across market participants of what transition entails. But we need to get the message to all Libor users – firms need to educate their customers.”

UK regulatory authorities and the Bank of England decided to shut down the controversial Libor benchmark following years of scandal, alleged manipulation and a decline in activity, replacing it with the Sonia (Sterling Overnight Index Average). In 2017, 20 banks agreed to continue making submissions to Libor until 2021 to ensure a smooth transition as the benchmark was phased out.

Research published in January found that 75% of buy-side firms 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 is thought to be around 40%. Just 2% of investment funds and asset managers have completed preparations and renegotiated contracts ahead of the withdrawal of Libor in 2021, according to the research.

In February, the Investment Association published a set of guidelines to assist the buy-side with the transition from Libor and urged firms to start work immediately. A survey of the Investment Association’s members found that almost three-quarters have already invested in Sonia instruments.

“There is much to welcome in sterling markets but progress needs to accelerate… But firms should not leave it to the last moment, relying on the efforts of others. Firms need to invest in the necessary changes now,” Ramsden concluded.