Insight & Analysis

Libor transition: achievements and progress but more remains to be done

Published: Feb 2022

A recent update from the Financial Conduct Authority notes that overnight SONIA, compounded in arrears, is fully embedded across sterling markets. Still, the focus is now on corporates transitioning away from the use of synthetic LIBOR.

People holding up cogs together to represent progress

Last December sterling markets navigated the end of LIBOR and the critical step in the shift in global interest rates to alternative risk-free reference rates. In a recent statement the Bank of England, FCA and Working Group have reflected on recent achievements, setting out what more needs to be done and providing an update on how the Working Group will operate in the future.

“The first stage of a successful transition away from LIBOR in sterling markets has been achieved but there remain a number of challenges, particularly for end users,” said Sarah Boyce, policy and technical expert at the Association of Corporate Treasurers in response to the update, also highlighting the need for continued progress. “During 2022, particular focus will need to be on transitioning away from the use of synthetic LIBOR and identifying and working through the implications of non-sterling transition in the UK markets.


Encouragingly, overnight SONIA, compounded in arrears, is now fully embedded across sterling markets. Successful CCP conversion processes during December 2021 saw some of the largest single day amendments to financial contracts, with more than £13trn LIBOR-referencing contracts converted to SONIA. As a result, there are effectively no longer any sterling LIBOR linked cleared derivatives.

The implementation of ISDA’s IBOR Fallbacks saw a further reduction in the legacy stock of LIBOR-linked derivatives. In cash markets, SONIA floating rate note issuance since 2018 exceeds £120bn, and new SONIA lending exceeds £100bn across a diverse range of sectors and facility types. The Bank of England now estimates that, across all asset types, less than 2% of the total sterling LIBOR legacy stock remains and notes that firms, as expected by the Bank of England and FCA, have plans to address this residual exposure.

More to be done

However, the Bank of England, FCA and Working Group encourage firms to continue to pursue the active transition of legacy sterling LIBOR contracts currently using the temporary synthetic LIBOR, noting that transitioning these contracts to permanent robust alternatives remains the best way to retain control and economic certainty over existing agreements. The FCA has been clear that synthetic LIBOR is a temporary bridge to RFRs, and its availability is not guaranteed beyond the end of 2022. During 2022, the FCA will seek views on retiring one-month and six-month synthetic sterling LIBOR and on when to retire three-month sterling synthetic LIBOR.

Finally, the statement noted that 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. To support the transition from US dollar LIBOR, the FCA’s prohibition on its use in certain new contracts came into effect from the start of 2022, in line with US supervisory guidance. UK supervised entities should no longer be using US dollar LIBOR in new contracts, with limited exceptions, while the Bank of England, FCA and the Working Group encourage transition to robust alternative rates, such as SOFR.

The Working Group added that at its January meeting it had met its objective to ‘catalyse a broad-based transition to SONIA across sterling derivative, loan and bond markets’. There remains further work to be done to finalise the transition from LIBOR, primarily to support the continued active conversion of legacy sterling LIBOR-linked bonds and loans that are dependent on temporary synthetic LIBOR; and to consider any implications of non-sterling LIBOR transition in UK markets. The Working Group will therefore be moving forwards in an amended form and with new objectives, and with continued support from the Bank of England and FCA.

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