Act now for the TERMination of LIBOR

January 17 2020

Phil LloydHead of Market Structure & Regulatory Customer Engagement

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A stream of information from the BofE and FCA on LIBOR transition lands some key messages

On 16 January the industry received a wakeup call for 2020 with a plethora of letters, roadmaps and papers to digest. Most of this isn’t new but does remind us that as referenced in our piece “20:20 vision” it's a big year for the market transition.

Not that we felt it was needed but the clear message is that the clock is ticking with a bold statement that: ‘The intention is that sterling London Interbank Offered Rate (LIBOR) will cease to exist after the end of 2021. No firm should plan otherwise.’

The Risk-Free Rates group re-iterated the 2020 targets:

  • Enable a further shift of volumes from LIBOR to Sterling Overnight Index Average (SONIA) in derivative markets, supported by a statement from the Bank and FCA encouraging a switch in the convention for sterling interest rate swaps from 2 March 2020; (unusual to see a specific date although we did expect Q1/Q2)
  • Cease issuance of cash products linked to sterling LIBOR by end-Q3 2020; and
  • Significantly reduce the stock of LIBOR referencing contracts by Q1 2021

To Term or not to Term…

2020 will be a big year for Term rate although whether you think you will be using it or not is the real question. While it’s been in the pipe for a while, the RFR group today also published a paper that looks at who NEEDS a Term Rate (certainly not WANTS one). As we've said before - for the few, not the many.

The New Year is off to a bang, setting the ‘convention’ for the year ahead with heat being put back on transition plans.

It recognises that while “Current users of SONIA compounded in arrears include larger and more sophisticated corporates and specialist lending sectors. Smaller corporate and retail clients for whom simplicity and/or payment certainty is a key factor may wish to consider alternative rates such as a fixed rate, the Bank of England’s Bank Rate (the “Bank Rate”, which is an overnight rate), or a SONIA term rate.”

Consent Solicitation

The market has made good progress with Associated British Ports being the poster child for transition. To ensure the market can learn from these examples a paper has also been published that talks to progress and some considerations for conduct of consent solicitation to transition English bonds from LIBOR to SONIA.

So while much of the information is not new, it does stress how important 2020 is, how some parts of the market will have to allocate time to managing and understanding compounding (have we mentioned tools to help such as and how little time there is if the Term Rate is only published by Q3 2020.


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