Bank of England warns firms keep writing new Libor contracts despite pending discontinuance

Maria Nikolova

In particular, in loan markets, Libor-linked lending continues to dominate, according to a piece of analysis prepared by the Bank of England.

Open a bank account directly with a central bank

The Bank of England (BoE) has earlier today published an analytical piece regarding the preparedness of markets for the end of Libor. The contents of the article resemble that of a similar piece of research posted by the BoE in June 2018 when it warned that market participants keep accumulating Libor-linked sterling derivatives for periods after 2021.

Today, the Bank said that, as Libor is poised to be discontinued after end-2021, the use of alternative interest rate benchmarks is steadily increasing. However, use of Libor remains widespread, and this poses risks to market stability.

Users of Libor are expected to prepare by transitioning to alternative, more robust benchmarks, such as overnight risk-free rates.

In sterling markets, the primary alternative is SONIA, which is published by the Bank of England and based on an average of over £40 billion of transactions each day. This supports a well-established and growing derivatives market, and has rapidly become the benchmark of choice for floating rate bonds over the last year.

Let’s recall that, in June 2019, Dave Ramsden, Deputy Governor for Markets & Banking at the Bank of England, voiced a somewhat upbeat stance about the process of moving away from Libor. He said there had been real progress in establishing SONIA as the successor to sterling Libor. In the preceding six months there had been a number of positive developments in the sterling cash market, he noted. For instance, SONIA linked floating rate note (FRN) issuance dominated sterling floating rate financials issuance and there was clear momentum towards using the compounded SONIA rate across bond markets.

Today, BoE said that, despite the progress in establishing alternative reference rates and in building these new markets, much more work is needed to complete the transition, as many new contracts maturing beyond 2021 continue to reference Libor.

In particular, in loan markets, Libor-linked lending continues to dominate, the Bank warns. And many new long-dated derivative contracts also continue to reference Libor, with steady growth in the stock of cleared sterling Libor swap contracts maturing beyond 2021.

The Bank notes that firms now have to focus on shifting new business from Libor to alternative rates, and should put in place a clear transition plan to mitigate their legacy risk from older contracts. Firms are expected to be able to run their business without Libor from the end of 2021, so it is not in their interests to continue to increase exposures to Libor, or to have a large stock of legacy contracts that will become subject to significant legal uncertainty beyond that point, the Bank said.

Read this next

Industry News

SEC awards $20 million to whistleblower despite degree of culpability and reporting delay

The Securities and Exchange Commission has awarded a whistleblower with $20 million for providing new and critical information that led to the success of an enforcement action.

Institutional FX

Tradesmarter’s white label WOW TRADER integrates with TradingView

Tradesmarter’s white label trading platform solution WOW TRADER has integrated with TradingView, the high performance and mobile friendly charting tool.

Industry News

ASIC loses fee overcharging case against Commonwealth Bank of Australia

“ASIC pursued this case because we believed CBA did not have robust compliance systems to ensure customers were being correctly charged. ASIC will carefully consider the judgment and continue to work to ensure large financial institutions charge fees correctly and put their customers first.”

Digital Assets

Kraken pays $362K fine for onboarding Iranian users

Cryptocurrency exchange Kraken will pay $362,158 to settle its civil liability for apparent violations of US sanctions on countries like Iran, the Treasury Department’s Office of Foreign Assets Control said.

Digital Assets

Bankrupt lender BlockFi owes $275 million to FTX.US

Distressed crypto lender BlockFi has filed for Chapter 11 bankruptcy protection, nearly two weeks after halting withdrawals of customer deposits due to significant exposure to bankrupt exchange FTX.

Metaverse Gaming NFT

Astar Network powers WASM smart contract devs with Swanky toolkit

Blockchain innovation hub Astar Network is launching Swanky, an all-in-one tool for smart contract developers that bridges the elements of WebAssembly (WASM) ecosystem into a single interface.

Digital Assets

Crypto exchange AAX’s marketing exec leaves as withdrawal halt continues

Atom Asset Exchange (AAX) is losing Ben Caselin, its vice president for global marketing and communications, at a time when senior executives continue to leave the crypto exchange at a critical time.

Digital Assets

A Safe Platform To Trade Your Cryptocurrency

We’ve all probably wondered at one point in time if we should even bother with cryptocurrencies. Judging by the rapid demand for cryptos, it seems that it’s only just the beginning. Once we’ve established and decided that ‘of course’ cryptocurrencies are a market worth delving into, there comes the hardest question of them all: which crypto exchange should I go with?

Retail FX

OctaFX broker invites everyone on a festive trading journey

This winter, the global Forex broker OctaFX invites every trader on a four-week trading journey aboard its Festive Express. A massive New Year campaign will appeal to all who love lucrative offers. It is the perfect opportunity to start celebrating the coming year.