FCA has no plans to compel banks to join or rejoin LIBOR panels after end-2021

Maria Nikolova

FCA Director of Markets and Wholesale Policy outlines the key next steps in the transition away from LIBOR.

Shortly after the UK Financial Conduct Authority (FCA) warned that it would monitor whether firms treat customers fairly when replacing LIBOR, the regulator has outlined the next steps in transitioning away from LIBOR. In a speech delivered today Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, focused on these key steps.

In sterling swaps and loan markets, sterling LIBOR public bond issuance appears to have ceased, he noted. But in sterling, as well as in US dollar, Japanese yen and Swiss francs, significant volumes of new LIBOR swaps maturing after end-2021 are still being struck.

In sterling IRS (interest rate swap) markets, the FCA will be encouraging market makers to make SONIA the market convention from the first quarter of 2020. This means making it standard to quote and offer swaps based on SONIA rather than LIBOR.

In the loan market, however, the task ahead is a bigger one. Use of LIBOR is rare in new mortgages. It is getting even rarer as the handful of smaller lenders still using LIBOR have completed, or near completion of their transition programs. Alternatives, including both fixed rates and alternative variable rates are already widely used. One of these is Bank rate (which past data show SONIA to have tracked closely).

Regarding global derivatives markets, moving away from LIBOR altogether is likely to be the best way of avoiding LIBOR risks, Mr Latter said. But another important safety belt is ensuring that contracts that rely on LIBOR have clear fall backs that deal effectively with the prospective end of LIBOR. This is valid especially for the swaps market, given the sheer size of exposures.

At this stage, Mr Latter admitted, the FCA does not know precisely how the LIBOR ‘end-game’ will play out. It may be that for all 35 LIBOR currency-tenor pairs a final cessation date can be announced comfortably in advance, and transition away from each of these rates can be substantially completed in an orderly manner before then.

The FCA has warned that firms must not assume LIBOR will continue beyond end-2021 even if transition is not substantially complete.

But another possible variation of the end-game is that LIBOR’s final cessation is preceded by a period in which it is still published but no longer passes the key regulatory test of being capable of measuring the underlying market or economic reality. In other words the benchmark is no longer ‘representative’. The most obvious reason for failing this test would be the departure of panel banks.

If LIBOR becomes unrepresentative, this would be an irreversible step towards the end of panel bank LIBOR. The FCA does not plan to compel banks to join or rejoin LIBOR panels after end-2021. The regulator has already made our agreement with the panel banks. In any case, the more obvious time to use a panel bank compulsion tool would be before the rate became unrepresentative rather than afterwards.

“Let me repeat that the best way to avoid LIBOR-related risks is to move off LIBOR altogether”, Mr Latter concluded.

Lenders and borrowers using SONIA or other variable rates, or fixed rates, will not face LIBOR risks. Banks and asset managers with SONIA or SOFR swaps and futures will not face these risks. But for those not quite ready to make this move to SONIA, SOFR or equivalents yet, contractual fall backs offer a safety net.

Read this next

Retail FX

Financial Commission adds FX broker Bold Prime to membership roster

The Financial Commission today announced that it has added Bold Prime to its member roster, which is made up of online brokerages operating in FX, derivatives and cryptocurrency markets.

Digital Assets

Despite crypto winter, Cake DeFi paid out $58 million in Q2 rewards

According to its latest ‘Transparency Report,’ Cake DeFi continued its growth trajectory in the three months through June 2022, even as the entire crypto industry experienced macro challenges this quarter.

Retail FX

SimpleFX Review: Cryptos, Spreads, Pros & Cons

SimpleFX combines years of Forex and cryptocurrency experience with a focus on offering resources to retail traders. 

Retail FX

Ironbeam becomes CME clearing member and launches MT5

“The direct clearing aspect along with our low-latency proprietary trading tools and technology solutions make Ironbeam the ideal trading destination.”

Institutional FX

Top 0.07%: oneZero makes it to Inc. 5000 of fastest growing companies in America

oneZero started out by serving the foreign exchange trading community, developing and executing technology that could scale with the growth of the FX market.

Industry News

CFTC wins case against broker for secretly taking other side of client orders in block trades

“As we said at the outset of this case, the illegal use of inside or confidential information undermines confidence in markets and will not be tolerated.”


BankiFi raises $4.8m to bring embedded banking platform to North America

“Our mission is to make all aspects of cash management and payments easier for SMBs everywhere, and this investment is another huge step to making that a reality.”

Executive Moves

Shieldpay hires ex-Payoneer Chris Andrews as Head of Sales

“We’ll be expanding our position in existing markets and accelerating growth into new verticals, whilst building on our direct and indirect channels.”

Digital Assets

Crypto.com secures preliminary approval to operate in Canada

Crypto.com, one of the longest-established crypto platforms, has become the first digital asset platform to sign a Pre-‘Registration Undertaking’ with the Ontario Securities Commission (OSC) in Canada.