UK regulators fire Libor warning shots as deadlines loom
The Bank of England and the Financial Conduct Authority (FCA) has released a set of deadlines for firms to phase out the London Interbank Offered Rate (Libor) benchmark interest rate.
Both authorities have written in a notice that firms should be prepared to switch from Libor to the Sterling Overnight Index Average (Sonia) in Q1 2020, with a formal deadline identified at 2 March 2020.
According to the regulators, the market for Sonia – the heir presumptive to the discredited Libor – is already well established, with Sonia swaps exceeding £4.5 trillion per month over the past six months.
Following the Libor scandal and subsequent Wheatley Review, it was concluded that banks and market participants must make a move away from the widely-used benchmark rate by 2021.
“We have seen great progress in the development of the Sonia derivatives market,” says director of markets and wholesale policy at the FCA, Edwin Schooling Latter.
“I encourage all market participants to join the initiative to put Sonia first over Libor from 2 March. This should help make Sonia the market standard in sterling swaps as is already the case in the bond market.”
In a piece published on its website the Bank of England states that the “time to act is now”, and that firms need to accelerate their processes to truly be prepared for cessation in 2021.
“2020 will be a pivotal year in the transition journey, with critical focus on enabling the flow of new business away from sterling Libor,” says Tushar Morzaria, chair of The Working Group on Sterling Risk-Free Reference Rates.
“[The group] has therefore defined a key priority to cease issuance of sterling Libor cash products by the end of Q3.”
Last December the International Swaps and Derivatives Association (ISDA) wrote to the FCA and to the Federal Reserve Bank of New York, stating that the industry needs greater clarity before it can attempt to create consensus on how to best deal with the transition.
“Financial services firms have to date adopted a ‘wait and see’ approach, with the mantra ‘this might not happen’,” Murray Longton, principal consultant at Capco, says in an emailed comment.
“Previously the onus has been on banks, asset managers and corporates to work together to make calculated decisions as to how best transition from Libor to risk free rates. Evidently, today’s announcement from the FCA shows frustration at the rate of change and transition – it’s not happening quickly enough.
“This marks a clear change in direction from the FCA and Bank of England, and is very much in line with last week’s release from the Financial Stability Board in the US, which surveyed the industry and was extremely concerned about its lack of preparedness. It’s now essential that financial services firm take the initiative, shrug off the inertia and get on the front foot to address the changes they must make to address the Libor transition.”