Transition from LIBOR

The interest rate benchmark LIBOR is being wound down. End dates have been announced for all the LIBOR panels. Firms must take appropriate action to transition to alternative rates. Find out more about ongoing transition initiatives and actions we are taking to facilitate the transition.

LIBOR is currently produced in 7 tenors (overnight/spot next, one week, one month, two months, three months, six months and 12 months) across 5 currencies. It is based on submissions provided by a panel of 20 banks. These submissions are intended to reflect the interest rate at which banks could borrow money on unsecured terms in wholesale markets. Both the FCA and the Bank of England’s Financial Policy Committee (FPC) noted in 2017 that it had become increasingly apparent that the absence of active underlying markets and the scarcity of term unsecured deposit transactions raised serious questions about the future sustainability of the LIBOR benchmarks.

The LIBOR panel banks agreed to continue to submit to LIBOR until end-2021 (subsequently extended to end-June 2023 for US dollar LIBOR only), to enable time for the market to transition away from LIBOR.

In March 2021, the FCA and ICE Benchmark Administration (the administrator of LIBOR) announced that sterling, euro, Swiss franc and Japanese yen LIBOR panels, as well as panels for 1-week and 2-month US dollar LIBOR, will cease at end-2021, with the remaining US dollar LIBOR panels ceasing at end-June 2023.

We will be consulting on using proposed new powers, which the Government is legislating to grant us under the Benchmarks Regulation (for more detail, see below), to require continued publication on a changed methodology (also known as a ‘synthetic’) basis for the 1-month, 3-month and 6-month sterling LIBOR settings and, until end-2022, the same Japanese yen LIBOR settings.

We will continue to consider the case for using these powers for the 1-month, 3-month and 6-month US dollar LIBOR settings, when the US dollar LIBOR panel ends in June 2023, but market participants should not rely on our doing so. These synthetic LIBOR rates are not intended for use in new contracts, but may be available to some holders of 'legacy' LIBOR-referencing contracts that they are unable to amend.

All market participants need to take appropriate action to remove dependencies on LIBOR.

In September 2019, we sent a joint Dear CEO letter with the PRA to major banks and insurers supervised in the UK, asking for the preparations and actions they are taking to manage the transition from LIBOR to alternative interest rate benchmarks. Based on the responses, we have published a feedback statement to help inform firms’ planning for the cessation of LIBOR.

In January 2020, we sent a joint Dear CEO letter with the PRA to major banks and insurers supervised in the UK, setting out our initial expectations for transition progress during 2020.

In March 2021, we published a joint Dear CEO letter with the PRA setting out our expectation that all firms meet the milestones of the Working Group on Sterling Risk Free Reference Rates (RFRWG) and the targets of other working groups and relevant supervisory authorities, as appropriate. We stressed the importance for firms to determine the specific actions necessary to mitigate the risks to safety and soundness arising from their firm’s exposures to LIBOR, to ensure good client outcomes and to preserve market integrity.

We also wrote a Dear CEO Letter to all UK regulated asset management firms to set out our expectations as they prepare for the end of LIBOR.

We encourage all firms (even those which are not banks, insurers or asset managers) who currently rely on LIBOR to read, reflect and act on these communications. We expect them to take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or harm to consumers, and to support industry initiatives to ensure a smooth transition.

Transition to alternative risk-free rates

Alongside the Bank of England, we are working closely with market participants to support the transition away from LIBOR in sterling markets, particularly through the Working Group on Sterling Risk-Free Reference Rates (RFR Working Group).

In April 2017, the RFR Working Group recommended a reformed version of the Sterling Overnight Index Average (SONIA) benchmark as its preferred near Risk Free Rate (RFR) for sterling markets. This rate is administered by the Bank of England. Following its recommendation, the RFR Working Group is now focused on has helped to catalysing a broad-based transition to SONIA in sterling bond, loan and derivatives markets. The RFR Working Group has published a roadmap for completion of the transition away from sterling LIBOR. 

SONIA offers a robust alternative to LIBOR. The rate is based on overnight interest rates in wholesale markets, so is close to a risk-free measure of borrowing costs. The rate is robust and anchored to an active and liquid underlying market. It can be compounded over a lending period to produce a term interest rate. There are a number of advantages to borrowers and other market participants from using near RFRs, compounded as appropriate.

International coordination on benchmark reform

The Financial Stability Board’s (FSB) Official Sector Steering Group (OSSG) coordinates international efforts on benchmark reform and the transition from LIBOR to RFRs. The OSSG is co-chaired by Andrew Bailey, Governor of the Bank of England and John Williams, President and CEO of the Federal Reserve Bank of New York.

The FSB has published a global transition roadmap for LIBOR, which sets out a timetable of actions for financial and non-financial sector firms to take in order to ensure a smooth LIBOR transition.

The RFRs recommended as alternatives to LIBOR by the relevant market-led working group for each jurisdiction, are as follows.

 

Jurisdiction

Working Group

Alternative Ref Rate Name

Administrator

Collateralisations

Description

United States of America

Alternative Reference Rates Committee

Secured Overnight Financing Rate (SOFR)

Federal Reserve Bank of New York

Secured

Secured rate that covers multiple overnight repo market segments

United Kingdom

Working Group on Sterling Risk-Free Reference Rates

Sterling Overnight Index Average (SONIA)

Bank of England

Unsecured

Unsecured rate that covers overnight wholesale deposit transactions

Switzerland

The National Working Group on CHF Reference Rates

Swiss Average Rate Overnight (SARON)

SIX Exchange

Secured

Secured rate that reflects interest paid on interbank overnight repo rate

Japan

Study Group on Risk-Free Reference Rates

Tokyo Overnight Average Rate (TONAR)

Bank of Japan

Unsecured

Unsecured rate that captures overnight call rate market

Euro area

Working Group on Risk-Free Reference Rates for the Euro Area

Euro short-term rate
(€STR)

European Central Bank

Unsecured

Unsecured rate that captures overnight wholesale deposit transactions

We also chair the Taskforce on Financial Benchmarks, which is part of the International Organization of Securities Commission (IOSCO). This taskforce considers a range of benchmark-related issues, including the transition away from LIBOR.

ISDA Protocol

On 23 October 2020, the International Swaps and Derivatives Association (ISDA) launched its IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol. The FSB’s OSSG had asked ISDA to lead the work on derivatives robustness and ISDA consulted on how best to calculate fair replacement rates for LIBOR. Through the FSB, authorities globally have strongly encouraged adherence to the Protocol, which came into effect on 25 January 2021 for all adhering parties. The Protocol remains open for adherence.

The FCA’s view is that amending a reference rate or adding a fallback would not trigger the application of margin or clearing requirements under EMIR, where this amendment relates to the treatment of legacy LIBOR trades (as set out previously in the minutes of the Working Group on Sterling Risk-Free Reference Rates meeting of 7 November 2019, paragraph 23).

We have also clarified our expectations regarding reporting requirements under UK EMIR in the context of LIBOR transition and the operation of contractual fallbacks.

Proposed new powers under the Benchmarks Regulation

To help ensure an orderly wind-down of critical benchmarks such as LIBOR, the Government has proposed legislation as part of the Financial Services (FS) Bill to amend the Benchmarks Regulation to give the FCA enhanced powers. The FS Bill has been introduced into Parliament and is subject to debate and consideration before it may be enacted.

The proposed legislation would empower us to protect those who cannot amend their contracts by directing the administrator of a critical benchmark to change the methodology used to compile the benchmark in certain circumstances, if doing so would protect consumers and market integrity. This would allow the FCA to stabilise certain LIBOR rates during a wind-down period so that limited use in legacy contracts could continue. We are required to publish Statements of Policy before exercising certain new powers and we would need to have regard to them when exercising these powers.

We set out our approach to developing these Statements of Policy. 

Contact us

Firms should speak to their normal supervisory contact if they would like more information or contact us.

Key resources

FCA speeches 

FCA news and statements

FCA publications

Financial Stability Board publications

IOSCO publications

Other relevant publications

Page updates

26/03/2021: Information added
19/01/2021: Information added ISDA Protocol section.
19/01/2021: Information added ISDA Protocol section.