FCA Asks Financial Firms to Drop Synthetic LIBOR for Robust Alternative

Time Stamp: February 9, 2022 7:43 AM
Source Node: 1605787

On Wednesday, the UK’s Financial Conduct Authority, along with the Bank of England and a Working Group, has asked the financial companies that are using synthetic LIBOR to adopt a permanent and robust alternative to the controversial LIBOR.

The FCA discontinued most of the LIBOR at the end of 2021. This prompted a majority of the industry to make a transition to SONIA, as £13 trillion LIBOR-referencing contracts converted to SONIA last December. It also added that there is no longer any sterling LIBOR-linked cleared derivatives.

But the UK agency introduced a synthetic LIBOR in November for two currencies, pound sterling and yen, for its temporary usage in existing contracts. “The FCA has been clear that synthetic LIBOR is a temporary    bridge  to RFRs, and its availability is not guaranteed beyond end-2022,” the regulator clarified.

It will consider retiring 1-month and 6-month synthetic sterling    LIBOR  at the end of 2022 and will also decide on a date to put an end to the 3-month sterling synthetic LIBOR.

The Dominance of SONIA

The FCA’s decision to put an end to LIBOR also prompted other global regulators to urge companies to find alternatives to the widely used benchmark. By far, SONIA is the most used alternative in the UK. Its floating rate note issuance in cash markets exceeded £120 billion since 2018, and new SONIA lending went over £100 billion in diverse sectors.

According to the Bank of Estimates, less than 2 percent of the total sterling LIBOR legacy stock remains and notes still remained, and firms are already addressing this residual exposure.

“It is difficult to think of a more far-reaching and substantial market shift in recent years than the transition away from LIBOR, said Andrew Bailey, the Bank of England Governor. “The fact that most LIBOR settings ended at end-2021 with minimal disruption is a testament to the co-operation across a wide range of industry sectors and jurisdictions.”

On Wednesday, the UK’s Financial Conduct Authority, along with the Bank of England and a Working Group, has asked the financial companies that are using synthetic LIBOR to adopt a permanent and robust alternative to the controversial LIBOR.

The FCA discontinued most of the LIBOR at the end of 2021. This prompted a majority of the industry to make a transition to SONIA, as £13 trillion LIBOR-referencing contracts converted to SONIA last December. It also added that there is no longer any sterling LIBOR-linked cleared derivatives.

But the UK agency introduced a synthetic LIBOR in November for two currencies, pound sterling and yen, for its temporary usage in existing contracts. “The FCA has been clear that synthetic LIBOR is a temporary    bridge  to RFRs, and its availability is not guaranteed beyond end-2022,” the regulator clarified.

It will consider retiring 1-month and 6-month synthetic sterling    LIBOR  at the end of 2022 and will also decide on a date to put an end to the 3-month sterling synthetic LIBOR.

The Dominance of SONIA

The FCA’s decision to put an end to LIBOR also prompted other global regulators to urge companies to find alternatives to the widely used benchmark. By far, SONIA is the most used alternative in the UK. Its floating rate note issuance in cash markets exceeded £120 billion since 2018, and new SONIA lending went over £100 billion in diverse sectors.

According to the Bank of Estimates, less than 2 percent of the total sterling LIBOR legacy stock remains and notes still remained, and firms are already addressing this residual exposure.

“It is difficult to think of a more far-reaching and substantial market shift in recent years than the transition away from LIBOR, said Andrew Bailey, the Bank of England Governor. “The fact that most LIBOR settings ended at end-2021 with minimal disruption is a testament to the co-operation across a wide range of industry sectors and jurisdictions.”

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