Dave Ramsden of BoE discussed how prepared financial firms are for the transition from LIBOR, outlining the work done and the tasks to be completed in the future. He reflects on what progress market participants are making in terms of using risk-free rate alternatives such as SONIA.
Mr. Ramsden highlighted that LIBOR prices-in fluctuations in the perceived credit quality of banks; however, many users, alternative risk-free reference rates are better reflections of the general level of interest rates. FCA has secured a breathing space to enable the transition, but only until the end of 2021. The best way to make the most of the timetable set for LIBOR to end is for markets to focus on transitioning away from it, to new risk-free rates. For sterling markets, to the new risk-free rate is SONIA, an overnight benchmark provided by BoE and underpinned by transactions worth about GBP 40 billion a day. The need to transition is a critical one for all involved. Risk-free rate transition is a core part of BoE’s strategic goal to catalyze reforms in financial markets to make them fairer and more effective. The good news is, transition is happening. There has been real progress in establishing SONIA as the successor to sterling LIBOR.
In the past six months, there have been a number of positive developments in the sterling cash market. There is a need for further progress in building required infrastructure, not just to issue, but to hold, value, and risk-manage SONIA-based instruments. This progress is a positive sign, but the pace of progress needs to accelerate. There is much more to be done. BoE has a positive, market-driven plan geared toward finding ways to overcome the barriers to further transition. This is led by the Sterling Risk Free Rate Working Group, whose objective is to catalyze a broad-based transition to using SONIA. PRA and FCA took a decision to send a letter to the largest banks and insurers requesting sight of their Board-approved plans for managing the risks around LIBOR cessation. BoE and FCA have already responded to the individual firms involved and BoE published thematic findings from the exercise. The letter has achieved one of its original objectives of helping to focus senior minds on this topic. Each firm written to now has a dedicated Senior Manager under the Senior Managers regime with responsibility for overseeing the transition.
BoE is committed to this transition being orderly and managed. Ultimately transition needs to be market led, but will be enabled with the continued coordination and collaboration between the public and private sector. Mr. Ramsden highlighted that BoE will ensure a strong focus on the markets’ transition to SONIA through its Working Group and its Senior Advisory Group. BoE will, if needed, intensify supervisory engagement on individual firms’ plans and continue to work together with other authorities internationally, through the FSB. He concluded that firms must be focused on what needs to be done to be able to transact SONIA-based products and the firms must stop adding to their post 2021 LIBOR exposures. There is a growing recognition across market participants of what transition entails. Firms should not leave it to the last moment; they need to invest in the necessary changes now.
Keywords: Europe, UK, Banking, Insurance, Securities, LIBOR, Risk-Free Rates, SONIA, Reference Rates, FCA, PRA, BoE
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