Regulation

FCA issues Libor warning: 'The time to act is now'

Lenders must move away from using the London Interbank Offered Rate from 2021.

Rozi Jones
|
16th January 2020
FCA new
"The Bank and the FCA have written to major banks and insurers to set out our expectations for transition progress during 2020"

The Bank of England and the FCA have issued new documents outlining priorities and milestones for 2020 on Libor transition.

Following the Libor scandal and consequent Wheatley Review of 2012 which concluded that the widely-used benchmark rate had been manipulated, the Bank of England and FCA signalled that banks must move away from using the London Interbank Offered Rate from 2021.

In its place will be Sonia, the Sterling Overnight Index Average, the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market.

Market estimates suggest around $350 trillion worth of financial contracts are underpinned by Libor globally, including mortgages, and all contracts will need to be rebased from Libor to the new reference rate.

The regulators say that whilst good progress has been made, "firms need to accelerate efforts" to ensure they are prepared for Libor cessation by the end of 2021, warning that "the time to act is now".

The Working Group on Sterling Risk-Free Reference Rates (RFRWG) has outlined actions market participants should take to reduce Libor exposure and transition to alternative rates, including establishing a framework for the transition of legacy Libor products and considering how best to address issues “tough legacy” contracts.

The Bank of England and FCA have also sent a letter to major UK banks and insurers setting out initial expectations of firms’ transition progress during 2020 and encouraging market makers to switch the convention for sterling interest rate swaps from Libor to Sonia on 2 March 2020.

In October 2019, the Association of Mortgage Intermediaries raised concerns that brokers are unable to advise clients of how the move to Sonia will impact them beyond 2021.

The AMI is urging lenders to communicate their plans on the move from Libor to Sonia to intermediaries as soon as possible, as brokers continue to write new business on Libor-linked products.

Andrew Hauser, executive director for markets at the Bank of England, said: “Today’s suite of publications helps provide greater clarity to the market on a number of issues central to Libor transition as we head towards the 2021 deadline. I am particularly encouraged by the ambitious goals that market participants have set for themselves this year – including the aim to cease issuance of cash products linked to sterling Libor by 2020 Q3 – and by the steps already taken towards those goals, including the creation of new Sonia-linked loans and the conversion of legacy bonds. The groundwork has been laid for a decisive shift away from Libor in 2020.”

Christopher Woolard, executive director of strategy and Competition at the FCA, commented: “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. The Bank and the FCA have written to major banks and insurers to set out our expectations for transition progress during 2020 and to reaffirm our support for the Working Group’s targets. Firms must act now to help meet these targets and ensure a smooth transition to alternative rates by end-2021.”

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