FCA foresees the demise of LIBOR in favour of SONIA

Andrew Bailey’s speech today on the future of LIBOR discussed the recent developments that had been made and interestingly, the decision to move away from the benchmark and towards one that is based on factors such as the price of term funding.

The FCA has had conversations with market participants, which led it to examine  alternative benchmarks and make the decision to move away from LIBOR.

The transition away from LIBOR would be challenging but the FCA’s discussions with 20 panel banks that sustain and rely on LIBOR, revealed that it could probably be achieved within four or five years (i.e. until the end of 2021).

Andrew Bailey referred to the European Benchmark Regulation and its requirement for some firms using benchmarks to develop robust “written plans setting out the actions that they would take in the event that a benchmark materially changes or ceases to be provided”.  Part of those plans include having a contingency plan “that nominates one or several alternative benchmarks that could be referenced to substitute” benchmarks no longer provided.   On this point, the FCA has discussed with industry participants the use of the reformed model, SONIA.

The message to firms was clear; the planning and transition must begin in earnest to make way for an alternative benchmark.