30 September 2019

Bank of England: How prepared are markets for the end of Libor?

With Libor expected to be discontinued after end-2021, the use of alternative interest rate benchmarks is steadily increasing. But use of Libor remains widespread, and this poses risks to market stability, analysis at the Bank of England shows.

Users of Libor need to prepare by transitioning to alternative, more robust benchmarks, such as overnight risk-free rates.

In sterling markets, the primary alternative is SONIA, which is published by the Bank of England and based on an average of over £40 billion of transactions each day.  This supports a well-established and growing derivatives market, and has rapidly become the benchmark of choice for floating rate bonds over the last year.

In particular, in loan markets, Libor-linked lending continues to dominate. And many new long-dated derivative contracts also continue to reference Libor, with steady growth in the stock of cleared sterling Libor swap contracts maturing beyond 2021 .

Firms now need to focus on shifting new business from Libor to alternative rates, and should put in place a clear transition plan to mitigate their legacy risk from older contracts. In June 2019, the Prudential Regulation Authority and the Financial Conduct Authority published guidance for firms on the issues they need to consider when making a transition plan.

Firms must be able to run their business without Libor from the end of 2021, so it is not in their interests to continue to increase exposures to Libor, or to have a large stock of legacy contracts that will become subject to significant legal uncertainty beyond that point.

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