In order to ensure our clients remain informed with regards to LIBOR and how Leumi UK is recognising and responding to its discontinuation after 2021, we have prepared some FAQs.
What is happening?
The London Inter Bank Offered Rate – commonly known as LIBOR - is currently the benchmark for trillions of dollars of financial products worldwide.
Back in July 2017, the Financial Conduct Authority (FCA) indicated the potential discontinuation of LIBOR beyond 2021.
This triggered a wave of activity across the globe as the banking sector began to consider the implications and prepare for a transition to alternative benchmarks.
Then in 2018, CEO of the FCA Andrew Bailey gave weight to the message and encouraged market participants to make plans for a transition to alternative Risk-Free Rates (RFRs) from 2021.
Meanwhile, in April last year, the Bank of England took over the administration of the benchmark rate known as SONIA (Sterling Overnight Index Average). It issued a series of reforms as part of its implementation as a replacement to LIBOR.
What is IBOR?
Inter Bank Offered Rate – or IBOR – is the interest rate at which banks lend to and borrow from one another in the interbank market.
What is LIBOR?
London Inter Bank Offered Rate – or LIBOR – is one of a number of IBORs that are widely used in the financial markets, including as a benchmark rate for a large array of derivatives, boards, loans, securitisations, and deposits. Other IBORs include EURIBOR for the Euro and USD LIBOR Rate for US Dollar transactions.
LIBOR is calculated and published daily across five currencies (GBP, USD, EUR, JPY and CHF) and seven maturities (overnight, one week, and 1, 2, 3, 6 and 12 months) by the Intercontinental Exchange Benchmark Administrator (ICE BA). It is based on submissions from a panel of banks using available transaction data and expert judgement. It should provide an indication of the average rate at which each LIBOR contributor can borrow unsecured funds in the London interbank market for a given period, in a given currency. This average is published and then used by the financial markets.
Why are IBORs being replaced?
International regulators have been looking at reforming IBORs since 2013. In recent years, the number of interbank unsecured borrowing transactions has been steadily decreasing. As such, there has been a growing reliance on the expert judgement of panel banks on which to base LIBOR. This has led to concerns that LIBOR is no longer a representative or reliable benchmark reference rate. Global financial markets are now set to move away from using IBORs between now and 2021.
What will replace IBORs?
Regulators are promoting the development and adoption of “Risk-Free Rates” (RFRs) which are currently proposed to be overnight and term free. Working groups have been established across all major currencies to designate alternative overnight rates with four already selected:
- SONIA (GBP)
- SOFR (USD)
- TONAR (JPY)
- SARON (CHF)
Markets have already started to adopt these rates and there has been a rise in the number of SONIA-referenced swaps as well as recent examples of primary issuance of bonds referencing SONIA or SOFR.
How is Leumi UK responding?
Leumi UK supports the market transition from LIBOR. We’re working closely with our regulators, market participants, industry bodies and trade associations to ensure the transition is as smooth as possible for our customers.
We await the outcome of the Bank of England’s consultation on a term SONIA to help decide the future of existing LIBOR products and to steer the development of new products. We expect this to shape our own transition plans.
What does this mean for Leumi UK customers?
The market for alternative RFRs to replace LIBOR is still very much developing. In the meantime, LIBOR continues to be a widely accepted benchmark in corporate and commercial loans and other financial products.
The global financial markets are currently working together to agree on the best way to shift to alternative RFRs by the end of 2021 (or earlier) for new and existing financial products that may be affected.
Leumi UK will continue to update our customers as these plans develop and the situation is clearer.