Although there was hope that Covid-19 would delay the Libor transition, markets must prepare for announcements that the Libor interest rate benchmark will stop at the end of 2021, according to the Financial Conduct Authority (FCA).
Speaking at a virtual event organised by the Association of Corporate Treasurers, Edwin Schooling Latter, the FCA’s director of markets, said, “The scenario that you need to be ready for is that those are announcements of cessation. The transition away from Libor has not been postponed because of COVID-19.”
Libor, or the London Interbank Offered Rate, is an interest rate benchmark used in contracts worth around £355 trn globally. It is being scrapped after banks were fined for trying to manipulate it and global regulators, in particular, the FCA, is pushing for a hard deadline for the end of 2021.
In March, the regulator warned that the coronavirus pandemic was likely to make it harder for some firms to meet milestones for the transition from Libor to other rates such as Sonia – an overnight interest rate compiled by the Bank of England.
Earlier in the month, banks were required to offer customers non-Libor alternatives, and from the end of the first quarter of 2021, Libor loans can no longer be offered.
Last week, Natwest said it is writing to 3,500 companies to explain how delays in switching rates could increase the volatility of their borrowing costs and how to choose the most suitable new benchmark before Libor disappears at the end of 2021.
Customers were told to check there are no gaps in hedging across products if their derivatives and loans switch to Sonia at different speeds.
Libor has “terms” stretching out months or years, but much of Sonia usage will be based on “compounding” the rate over the term of a contract.
“Everyone on the inside of this exercise is very confident that the future centre of gravity of interest rates is going to be those overnight rates compounded in arrears,” Schooling Latter said.