The deadline to end the use of the Libor interest rate benchmark in new loans is being extended until the end of March 2021 due to the coronavirus pandemic, according to a joint statement by the UK Financial Conduct Authority (FCA), the Bank of England and the Working Group on Sterling Risk-Free Reference Rates.
They said that, within sterling cash markets, transition to the Libor replacement – the sterling overnight index average or Sonia rate – in the bond market had been largely completed, but full transition in the loans market would not be possible by the third quarter of this year because of the disruptions caused by Covid-19.
Libor is the rate used by companies in most of their short-term and floating debt and interest rate hedging with contracts maturing up to 50 years into the future.
The replacement of Libor is tied to the spate of scandals over the manipulation of the benchmark which is still used in financial contracts worth up to $400tn globally. They came to light in 2012 and some of the biggest investment banks and interdealer brokers have paid almost $10bn in fines to regulators around the world, while a handful of traders have gone to jail on Libor-rigging charges.
Although it has been widely recognised that the process of ending Libor is a complicated and challenging process, the FCA is adamant that “it remained a central assumption” that companies cannot rely on Libor being published after the end of 2021.
“There will likely be continued use of LIBOR-referencing loan products into Q4 2020 in particular, to maintain the smooth flow of credit to the real economy,” according to the UK watchdog. It added that by the end of the third quarter, lenders should include in all new and refinanced loans clear contractual arrangements to transition to Sonia or other alternatives ahead of the end-2021 Libor deadline.