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Libor: Banks must jump before they are pushed

Banks must prove to the increasingly impatient regulators that they have got Libor transition under control, or face costly consequences down the line.


On Thursday, the risk-free rate working group at the Bank of England published its priorities for the transition away from Libor to Sterling’s risk-free replacement interest rate, Sonia. 

Making a firm, if entirely predictable, statement that “the time to act is now”, the group declared that its requirements now include ceasing the issuance of cash products linked to Sterling Libor by the end of the third quarter of 2020; pushing a further shift of volumes from Libor to Sonia in derivative markets; establishing a framework for the transition of legacy Libor products; and considering how best to address “tough legacy” contracts. 

Regulators are now vocally upping the ante on Libor transition because of the ticking clock and the vastly differing levels of preparedness both between asset classes and between geographies. 

The problem they face is that these increasingly strident calls for action may become white noise as they increase in frequency up until Libor is due to expire. 

Languishing volumes

The Sterling market is widely viewed as being well advanced in the transition process, but at the end of last year Sonia derivative traded volumes were still languishing behind Libor volumes in tenors greater than two years. 

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