Transition from LIBOR

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].

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[3] 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[4] to help inform firms’ planning for the cessation of LIBOR.

In January 2020, we sent a joint Dear CEO letter[5] 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[6] 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[7] 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)[8].

In April 2017, the RFR Working Group recommended[9] a reformed version of the Sterling Overnight Index Average[10] (SONIA) benchmark[10] 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[11] 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[12] 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[13], 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.

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[21] and the ISDA 2020 IBOR Fallbacks Protocol[22]. 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[23] 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[24] 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[25] 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[26] 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[27] 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[28].

Key resources

FCA speeches 

• LIBOR – are you ready for life without LIBOR from end-2021?[29] – January 2021 
• LIBOR transition – the critical tasks ahead of us in the second half of 2020[30] – July 2020
• Next steps in transition from LIBOR[31] – November 2019 
• LIBOR: preparing for the end[32] – July 2019
• Ending reliance on LIBOR: Overview of progress made on transition to overnight risk-free rates and what remains to be done[33] – February 2019
• LIBOR transition and contractual fallbacks[34] – January 2019
• Interest rate benchmark reform: transition to a world without LIBOR[35] – July 2018
• The future of LIBOR[36] – July 2017

FCA news and statements

• Announcements on the end of LIBOR[37] – March 2021
• FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks[38] – March 2021
• The final countdown: Completing sterling LIBOR transition by end-2021[39] – January 2021
• FCA response to IBA’s proposed consultation on intention to cease US$ LIBOR[40] – November 2020
• FCA consults on new benchmarks powers[41] – November 2020
• FCA welcomes Financial Services Bill[42] – October 2020
• The FCA and the Bank of England encourage market participants in further switch to SONIA in interest rate swap markets[43] – September 2020
• FCA statement on planned amendments to the Benchmarks Regulation[44] – June 2020
• Benchmarks Regulation – proposed new powers[45] – June 2020
• Further statement from the RFRWG on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans[46] – April 2020
• Impact of the coronavirus on firms’ LIBOR transition plans[47] – March 2020
• LIBOR contractual triggers[48] – March 2020
• Next steps for LIBOR transition in 2020: the time to act is now[49] – January 2020
• Conduct risk during LIBOR transition: Question and answers[50] – November 2019
• The Bank of England and FCA launch next phase of sterling LIBOR transition work[51] – November 2017
• Panel banks agree to support LIBOR until end 2021[52] – November 2017

FCA publications

• FCA and PRA Dear CEO Letter: Transition from LIBOR to Risk-Free-Rates[6] – March 2021
• Joint letter from Bank of England and FCA to trade associations[53] – March 2020
• Dear CEO letter - Asset management firms: prepare now for the end of LIBOR[7] – February 2020
• FCA letter to ISDA on an unrepresentative LIBOR[54] – January 2020
• FCA and PRA Dear SMF letter: Next steps on LIBOR transition[55] – January 2020
• Conduct risk during LIBOR transition[56] – November 2019 
• Feedback on the Dear CEO letter on LIBOR transition[4] – June 2019
• FCA and PRA Dear CEO LIBOR letter[57] – September 2018

Financial Stability Board publications

• FSB encourages broad and timely adherence to the ISDA IBOR Fallbacks Protocol[27] – October 2020
• Global transition roadmap for LIBOR[58] – October 2020
• Supervisory issues associated with benchmark transition: Report to the G20[59] – July 2020
• FSB statement on the impact of COVID-19 on global benchmark reform[60] – July 2020
• User’s guide for overnight RFRs[61] – June 2019
• Interest rate benchmark reform – overnight risk-free rates and term rates[62] – June 2018
• Reforming Interest Rate Benchmarks[63] (note, annual progress reports following the July 2014 report can also be found on the FSB website[64]) – July 2014

IOSCO publications

• Statement on Communication and Outreach to Inform Relevant Stakeholders Regarding Benchmarks Transition[65] – July 2019
• Statement on Matters to Consider in the Use of Financial Benchmarks[66] – January 2018

Other relevant publications

• ISDA webinar - The Path Forward for LIBOR[67] and transcript[68] – December 2020
• Calling time on LIBOR: Why you need to act now[69] – January 2020