Britain’s financial markets regulator today released further details of measures designed to mitigate potential market disruption as the LIBOR regime came to an end on December 31.
As the end of LIBOR was drawing closer, the FCA and Britain’s central bank encouraged market participants to actively transition from referencing LIBOR rates in their sterling derivatives.
Instead of interbank offered rates, the FCA notes that overnight SONIA is now fully embedded across sterling markets. Successful CCP conversion processes during December 2021 saw some of the largest single day amendments to financial contracts, with in excess of £13 trillion LIBOR-referencing contracts converted to SONIA.
This shift is expected to boost liquidity in these products, which aided relevant providers in achieving the Working Group’s key milestone of ceasing GBP LIBOR-linked derivatives by the end of 2021. As a result, there are effectively no longer any sterling LIBOR linked cleared derivatives. Further, the central bank now estimates that less than 2% of the total sterling LIBOR legacy stock remains and notes that firms have plans to address this residual exposure.
As for the new contracts, these synthetic rates are no longer available for use or representative of their underlying markets. Therefore, firms need to prepare to use alternative reference rates for their new trades, irrespective of which LIBOR they use.
The FCA and BoE have been taking steps to promote the switch from LIBOR to SONIA. Throughout the last few years, they actively provided guidance to lenders, borrowers and investors who are amending their documentation to reference SONIA.
USD LIBOR transition
Nevertheless, the transition from US dollar LIBOR remains of critical importance globally, including in the UK where many firms are active in US dollar interest rate markets.
The regulator confirmed the June-2023 end date for most US dollar LIBOR settings. However, only five settings will continue to be calculated by panel bank submission until that date, but the use of US dollar LIBOR will not be allowed in most new contracts. The move to end the use of US dollar LIBOR in new contracts is supported by regulators in the US and around the world, the FCA said.
LIBOR, which underpins more than $300 trillion in derivatives and other instruments, is set to be replaced worldwide with the Bank of England’s Sonia rate for sterling-denominated swaps, loans and futures.
Global regulators urged market participants earlier last year to accelerate the shift to the Sonia overnight rate before it ceases issuance of cash products, referencing Libor by the fourth quarter.