Andrew Bailey speaks on the transition from LIBOR

The FCA has published a speech by Andrew Bailey, Chief Executive of the FCA, on transitioning from LIBOR to alternative interest rate benchmarks. Although important steps have been taken towards transition, Andrew Bailey commented that the transition is not yet fast enough and there is much further to go.

Points of interest in the speech include:

  • firms need to transition away from LIBOR before the end of 2021;
  • ensuring an orderly transition from LIBOR to alternative interest rate benchmarks will contribute to financial stability. Misplaced confidence in LIBOR’s survival will do the opposite, by discouraging transition;
  • by last summer working groups in the United States, the United Kingdom and Japan had chosen their alternatives to LIBOR in the form of SOFR, SONIA and TONA. In October, Switzerland’s National Working Group recommended SARON as alternative to Swiss franc LIBOR;
  • the sterling group working on transition to SONIA now directly involves over 100 firms and trade associations across its central Working Group, sub-groups and other fora;
  • an important next step for transition is the exploration of the potential to create forward-looking term rates based on the Risk Free Rates. The sterling Risk Free Rate Working Group is due to launch a landmark consultation on this next week;
  • fall back language to support contract continuity or enable conversion of contracts if LIBOR ceases is an essential safety net. In addition, the smoothest and best means for this transition is to start moving away from LIBOR in new contracts; and
  • firms will need to be able to demonstrate to FCA supervisors and their PRA counterparts that they have plans in place to mitigate the risks, and to reduce dependencies on LIBOR.