The interest rate benchmark LIBOR is expected to cease after end-2021. Firms must transition to alternative rates before this date. 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[1] (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[2].
We have received a voluntary agreement[3] from the LIBOR panel banks to continue to submit to LIBOR until end-2021, to enable time for the market to transition away from LIBOR. All banks and other market participants need to have removed dependencies on LIBOR by this date if they are to avoid disruption when publication of LIBOR ceases.
In September 2018, we sent a joint Dear CEO letter[4] 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[5] to help inform firms’ planning for the cessation of LIBOR. Furthermore, we wrote a Dear CEO Letter to all UK regulated asset management firms in February 2020[6] to set out our expectations as they prepare for the end of LIBOR.
We encourage all firms who currently rely on LIBOR to read, reflect and act on these communications. As well as banks, insurers and asset managers, the discontinuation of LIBOR will affect firms if they have not prepared for this event. We expect firms 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)[7].
In April 2017, the RFR Working Group recommended[8] a reformed version of the Sterling Overnight Index Average[9] (SONIA) benchmark[9] 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 catalysing a broad-based transition to SONIA in sterling bond, loan and derivatives markets.
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[10] and other market participants from using near RFRs, compounded as appropriate.
Further information on the RFR Working Group[11].
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. 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.
In July 2016, the OSSG asked the International Swaps and Derivatives Association (ISDA) to lead work to enhance the robustness of derivatives contracts referencing widely-used benchmarks, such as LIBOR. ISDA has consulted on how best to calculate fair replacement rates[12] for LIBOR in sterling, Swiss franc, Japanese yen[13] and US dollars[14]. These replacement rates are based on the RFRs recommended as alternatives to LIBOR by the relevant market-led working group for each jurisdiction, as follows.
|
Jurisdiction |
Working Group |
Alternative Ref Rate Name |
Administrator |
Collateralisations |
Description |
|---|---|---|---|---|---|
|
United States of America |
Federal Reserve Bank of New York |
Secured |
Secured rate that covers multiple overnight repo market segments |
||
|
United Kingdom |
Bank of England |
Unsecured |
Unsecured rate that covers overnight wholesale deposit transactions |
||
|
Switzerland |
SIX Exchange |
Secured |
Secured rate that reflects interest paid on interbank overnight repo rate |
||
|
Japan |
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[19] |
Euro short-term rate |
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’s (IOSCO). This taskforce considers a range of benchmark-related issues, including the transition away from LIBOR.
Contact us
Firms should speak to their normal supervisory contact if they would like more information or contact us[21].
Key resources
FCA speeches
- Next steps in transition from LIBOR[22] – November 2019
- LIBOR: preparing for the end[23] – July 2019
- Ending reliance on LIBOR: Overview of progress made on transition to overnight risk-free rates and what remains to be done[24] – February 2019
- LIBOR transition and contractual fallbacks[25] – January 2019
- Interest rate benchmark reform: transition to a world without LIBOR[26] – July 2018
- The future of LIBOR[27] – July 2017
FCA news and statements
- FCA statement on planned amendments to the Benchmarks Regulation[28] – June 2020
- Benchmarks Regulation – proposed new powers[29] – June 2020
- Further statement from the RFRWG on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans[30] - April 2020
- Impact of the coronavirus on firms’ LIBOR transition plans[31] – March 2020
- LIBOR contractual triggers[32] – March 2020
- FCA and Bank of England encourage switch from LIBOR to SONIA for sterling interest rate swaps from Spring 2020[33] – January 2020
- Next steps for LIBOR transition in 2020: the time to act is now[34] – January 2020
- Conduct risk during LIBOR transition: Question and answers[35] – November 2019
- The Bank of England and FCA launch next phase of sterling LIBOR transition work[36] – November 2017
- Panel banks agree to support LIBOR until end 2021[37] – November 2017
FCA publications
- Joint letter from Bank of England and FCA to trade associations[38] – March 2020
- Dear CEO letter - Asset management firms: prepare now for the end of LIBOR[6] – February 2020
- FCA letter to ISDA on an unrepresentative LIBOR[39] – January 2020
- FCA and PRA Dear SMF letter: Next steps on LIBOR transition[40] – January 2020
- Conduct risk during LIBOR transition[41] – November 2019
- Feedback on the Dear CEO letter on LIBOR transition[5] – June 2019
- FCA and PRA Dear CEO LIBOR letter[42] – September 2018
Financial Stability Board publications
- User’s guide for overnight RFRs[43] – June 2019
- Interest rate benchmark reform – overnight risk-free rates and term rates[44] – June 2018
- Reforming Interest Rate Benchmarks[45] (note, annual progress reports following the July 2014 report can also be found on the FSB website[46]) – July 2014
IOSCO publications
- Statement on Communication and Outreach to Inform Relevant Stakeholders Regarding Benchmarks Transition[47] – July 2019
- Statement on Matters to Consider in the Use of Financial Benchmarks[48] – January 2018
Other relevant publications
- Calling time on LIBOR: Why you need to act now[49] – January 2020