FCA warning on LIBOR transition by year-end

The Financial Conduct Authority (FCA) has warned firms that they must make sure they can complete their transition away from LIBOR to a new sterling benchmark before the end of the year

The LIBOR administrator, ICE Benchmark Administration, is consulting on ceasing publication of all sterling LIBOR settings at the end of 2021, leaving just one year for firms to remove their remaining reliance on these benchmarks.

The FCA and the Bank of England have set out their expectations for regulated firms to remove their reliance on LIBOR in all new business and in legacy contracts, where feasible.

Edwin Schooling Latter, director of markets and wholesale policy at the FCA, said: 'The end-game for LIBOR is now increasingly clear. Firms should now have everything they need to shift new business to SONIA and to complete their plans for transition of legacy exposures. There is no longer any reason for delay.'

In support of this, the Working Group on Sterling Risk-Free Reference Rates has published an update to its priorities and roadmap for the final year of transition.

In particular it has recommended that, from the end of March 2021, sterling LIBOR is no longer used in any new lending or other cash products that mature after the end of 2021.

All businesses with existing loans in sterling should already have heard from their lenders about the transition, and those seeking a new or refinanced loan today should be offered a non-LIBOR alternative. Throughout the remainder of the year, existing contracts linked to sterling LIBOR should be actively transitioned where possible.

The Working Group, the Bank of England, and the FCA anticipate that in future, the large majority of sterling markets will be based on the sterling overnight index average (SONIA) compounded in arrears, although in certain specific parts of the market, participants may need access to alternative rates.

Tushar Morzaria, chair, Working Group on Sterling Risk-Free Reference Rates, said: 'In line with the Working Group’s milestones for Q3 2020, lenders should now be in a position to offer loans based on SONIA or other LIBOR alternatives. I encourage all end users to engage with their lenders and trade associations as early as possible to ensure a smooth transition.'

Useful links:

Resources for transition planning

Working Group on Sterling Risk-Free Reference Rates roadmap

SONIA details

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