The transition away from the London Interbank Offered Rate (LIBOR) has reached a significant milestone as the overnight and 12-month US dollar LIBOR settings have permanently ceased. This development, according to the Financial Conduct Authority (FCA), marks a critical step in the process of moving away from this benchmark interest rate.
On Friday, the last remaining panel for US dollar LIBOR ended, signaling the nearing retirement of LIBOR. However, three synthetic settings—1-month, 3-month, and 6-month US dollar LIBOR—will continue to be published for existing contracts until September 2024. The decision follows feedback from the industry that a number of US dollar cash contracts, particularly outside the US, would benefit from a continued publication.
In April, the FCA said it will give, for the last time, banks an extra 15 months to stop using a “synthetic” version of US dollar Libor. Britain’s financial markets regulator has required ICE Benchmark Administration Limited (IBA) to continue to publish 1- and 6-Month “synthetic” US dollar LIBOR settings until September 2024, extending the deadline past its original end date of June 2023.
LIBOR has been a key benchmark interest rate for four decades, reflecting the borrowing costs between banks. It was based on quotes from panels of banks across various currencies, comprising 35 variants in total.
The FCA and BoE have been taking steps to promote the switch from LIBOR to SONIA. Throughout the last few years, they actively provided guidance to lenders, borrowers and investors who are amending their documentation to reference SONIA.
Nevertheless, the transition from US dollar LIBOR remains of critical importance globally, including in the UK where many firms are active in US dollar interest rate markets.
LIBOR, which underpins more than $300 trillion in derivatives and other instruments, is set to be replaced worldwide with the Bank of England’s Sonia rate for sterling-denominated swaps, loans and futures.
Global regulators urged market participants to accelerate the shift to the Sonia overnight rate before it ceases issuance of cash products, referencing Libor by the fourth quarter.
The move to end the use of US dollar LIBOR in new contracts is supported by regulators in the US and around the world.
As the end of LIBOR was drawing closer, the FCA and Britain’s central bank encouraged market participants to actively transition from referencing LIBOR rates in their sterling and USD derivatives.
Instead of interbank offered rates, the FCA notes that overnight SONIA is now fully embedded across FX markets. Successful CCP conversion processes saw some of the largest single day amendments to financial contracts, with in excess of £13 trillion LIBOR-referencing contracts converted to SONIA.
This shift is expected to boost liquidity in these products, which aided relevant providers in achieving the Working Group’s key milestone of ceasing LIBOR-linked derivatives.
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- Source: https://financefeeds.com/panel-bank-us-dollar-libor-now-permanently-ceased/
