After many years of preparation, 2021 is the critical year for firms to complete their transition away from LIBOR. The LIBOR administrator, ICE Benchmark Administration, is consulting on ceasing publication of all sterling LIBOR settings at the end of 2021, leaving just one year for firms to remove their remaining reliance on these benchmarks.
This issue touches numerous parts of the economy. LIBOR has been embedded in the financial system for many years, used to calculate interest in everything from corporate borrowing and intra-group transfers, to complex derivatives. It is also utilised in accounting practices, system infrastructure and other supporting functions. All of these will need to be ready to use alternative reference rates, such as SONIA, by the end of this year.
The Bank of England and the FCA have set out clear expectations for regulated firms to remove their reliance on LIBOR in all new business and in legacy contracts, where feasible. The primary way for market participants to have certainty over the economic terms of their contracts is to actively transition them away from LIBOR.
In support of this, the Working Group on Sterling Risk-Free Reference Rates (the Working Group) has published an update to its priorities and roadmap for the final year of transition to help businesses to finish planning the steps they will need to take in the coming months.
The Working Group’s top priority is for markets and their users to be fully prepared for the end of sterling LIBOR by the end of 2021. In particular the Working Group has recommended that, from the end of March 2021, sterling LIBOR is no longer used in any new lending or other cash products that mature after the end of 2021. All businesses with existing loans in sterling should already have heard from their lenders about the transition, and those seeking a new or refinanced loan today should be offered a non-LIBOR alternative. Throughout the remainder of the year, existing contracts linked to sterling LIBOR should be actively transitioned where possible.
In addition, the Working Group has recommended that firms no longer initiate new linear derivatives linked to sterling LIBOR after the end of March 2021, other than for risk management of existing positions or where they mature before the end of 2021.
The Working Group, the Bank of England, and the FCA have made clear that, in future, they anticipate that the large majority of sterling markets will be based on SONIA compounded in arrears, to provide the most robust foundation for the overall market structure. However, in certain specific parts of the market, participants may need access to alternative rates. In this context, the Working Group welcomes the development of term SONIA reference rates (TSRRs) which are beginning to be made available by various providers. Alongside this, the Working Group has engaged closely with the FICC Markets Standards Board (FMSB) to support development of a market standard for appropriately limited use of TSRRs, consistent with the Working Group’s objectives and existing recommendations on use cases of benchmark rates. The proposed FMSB standard is under review by key stakeholders during January and is expected to be released for public comment in February.
The Bank of England and the FCA continue to work closely with firms to secure a smooth transition. In particular, supervisors of regulated firms will continue to expect transition plans to be executed in line with industry-recommended timelines across sterling and other LIBOR currencies. Senior managers with responsibility for the transition should expect close supervisory engagement on how they are ensuring their firm’s progress relative to industry milestones.
