Since the announcement nearly two years ago by the head of the UK Financial Conduct Authority (FCA) that the FCA would no longer compel panel banks to provide London Inter-bank Offered Rate (LIBOR) submissions, it has becoming increasingly clear to participants in the financial markets that LIBOR will likely cease to exist after 2021 and that it is critical to prepare for the transition well in advance of that eventuality. Central bank working groups around the world have been developing and considering proposals to replace LIBOR and other Interbank Offered Rates (IBORs) with alternative benchmarks. For example, the Bank of England’s Working Group on Sterling Risk-Free Reference Rates selected the Sterling Overnight Index Average (SONIA) as its proposed benchmark for use in sterling derivatives and relevant financial contracts, and in the US, the Federal Reserve’s Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (SOFR). The working groups organised by the European Central Bank and the Bank of Japan have each selected alternative rates based on unsecured overnight transactions – the Euro Short-Term Rate (ESTR) and the Tokyo Overnight Average Rate, respectively.

Despite the progress made by certain jurisdictions in planning for the discontinuation of LIBOR, global regulators continue to express concern that many market participants are not sufficiently prepared for the transition. In September 2018, the FCA and the UK Prudential Regulation Authority issued letters to the CEOs of major banks and insurers inquiring about the preparations and actions the firms were taking to manage the transition from LIBOR to alternative benchmark rates.

Jul-Sep 2019 issue

Cleary Gottlieb Steen & Hamilton