Finalising LIBOR transition – achievements in sterling markets and what remains to be done

Joint press release

A critical step in the necessary shift in global interest rate markets towards more robust foundations was reached on 31 December 2021, as most LIBOR settings were published for the final time^{footnote [1]}. Sterling markets navigated this transition on time and with minimal disruption, supporting global transition efforts towards alternative risk-free reference rates (“RFRs”)^{footnote [2]}. The Bank of England, FCA and Working Group are now able to reflect on achievements in sterling markets, set out what more needs to be done and provide an update on how the Working Group will operate in the future.

Progress in sterling markets

Overnight SONIA, compounded in arrears, is now fully embedded across sterling markets. Successful CCP conversion processes during December 2021^{footnote [3]} saw some of the largest single day amendments to financial contracts, with in excess of £13 trillion LIBOR-referencing contracts converted to SONIA. As a result, there are effectively no longer any sterling LIBOR linked cleared derivatives^{footnote [4]}. The implementation of ISDA’s IBOR Fallbacks^{footnote [5]} saw a further reduction in the legacy stock of LIBOR-linked derivatives^{footnote [6]}. In cash markets, SONIA floating rate note issuance since 2018 exceeds £120bn, and new SONIA lending exceeds £100bn across a diverse range of sectors and facility types. The Bank of England now estimates that, across all asset types, less than 2% of the total sterling LIBOR legacy stock remains and notes that firms, as expected by the Bank of England^{footnote [7]} and FCA, have plans to address this residual exposure.

What more needs to be done?

The Bank of England, FCA and Working Group encourage firms to continue to pursue the active transition of legacy sterling LIBOR contracts currently using the temporary synthetic LIBOR. Transitioning these contracts to permanent robust alternatives remains the best way to retain control and economic certainty over existing agreements. The FCA has been clear that synthetic LIBOR is a temporary bridge to RFRs, and its availability is not guaranteed beyond end-2022^{footnote [8]}. The FCA must review its availability annually. During the course of 2022, the FCA will seek views on retiring 1-month and 6-month synthetic sterling LIBOR at the end of 2022, and on when to retire 3-month sterling synthetic LIBOR.

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. To support the transition from US dollar LIBOR the FCA’s prohibition on its use in certain new contracts came into effect from the start of 2022^{footnote [9]}, in line with US supervisory guidance^{footnote [10]}. UK supervised entities should no longer be using US dollar LIBOR in new contracts, with limited exceptions. The Bank of England, FCA and the Working Group encourage transition to robust alternative rates, such as SOFR^{footnote [11]}. Supervisors will continue to monitor UK regulated entities’ progress in transition.

How the Working Group will operate going forward

The Working Group concluded at its January meeting that it had met its objective to “catalyse a broad-based transition to SONIA across sterling derivative, loan and bond markets”. There remains further work to be done to finalise the transition from LIBOR, primarily to support the continued active conversion of legacy sterling LIBOR-linked bonds and loans that are dependent on temporary synthetic LIBOR; and to consider any implications of non-sterling LIBOR transition in UK markets. The Working Group will therefore be moving forwards in an amended form and with new objectives, and with continued support from the Bank of England and FCA.

As he steps down as Chair of the Working Group, the Bank of England and FCA thank Tushar Morzaria, Group Finance Director at Barclays, for his strong leadership on sterling LIBOR transition. We are pleased to welcome Sarah Boyce (Association of Corporate Treasurers) as the new Chair of the Working Group from 1 March 2022 to lead the group in the next phase of its work.

Andrew Bailey, Governor of the Bank of England, said:

“It is difficult to think of a more far-reaching and substantial market shift in recent years than the transition away from LIBOR. Following the ambitious roadmap laid out in 2017 to move markets to more robust risk-free rate alternatives, market participants have dedicated significant resources to ensuring a smooth transition and deliver a more robust financial system. The fact that most LIBOR settings ended at end-2021 with minimal disruption is a testament to the co-operation across a wide range of industry sectors and jurisdictions. With only a few settings remaining to facilitate the further wind-down of existing exposures, I would like to thank all involved for their efforts and encourage those with remaining LIBOR exposures to see this project through to its very end.”

Tushar Morzaria, Chair of the Working Group on Sterling Risk-Free Reference Rates, said:

“It has been an honour and a pleasure to guide the Working Group through one of the most complex market transformations of our lifetimes. I’m deeply grateful for the tireless efforts of our broad membership, over many years, to enable an orderly transition of the sterling interest rate markets to a more robust reference rate.”

Andrew Hauser, Executive Director for Markets at the Bank of England, said:

“The success of the transition from sterling LIBOR is a reflection of the expertise and efforts of the UK’s financial sector. A deep and liquid set of SONIA-based markets has been established, providing users with a more robust and resilient foundation to support their financial needs in the years to come.”

Edwin Schooling Latter, Director of Markets and Wholesale Policy and Wholesale Supervision at the FCA, said:

“We are grateful to all market participants who have contributed to the Working Group and the delivery of a smooth transition away from sterling LIBOR – moving interest rate markets to a more robust, more transparent, more appropriate foundation. There is still work to be done to remove remaining dependencies on LIBOR, but the experience gained will help continued progress.”