FCA Asks Financial Firms to Drop Synthetic LIBOR for Robust Alternative

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 the majority of the industry to make a transition to SONIA, as £13 trillion LIBOR-referencing contracts converted to SONIA last December. In addition, it 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 Bridge The bridge or liquidity bridge is an essential component for brokers that are enabling their clients to trade at interbank rates directly via a Prime Broker or a Prime-of-Prime (PoP). While market makers do not require a bridge in order to service their clients, brokers which are sending through orders to a liquidity provider or an electronic execution venue need a bridge to connect their trading platform to the interbank market.Bridges are used extensively in forex trading, specifically for Met The bridge or liquidity bridge is an essential component for brokers that are enabling their clients to trade at interbank rates directly via a Prime Broker or a Prime-of-Prime (PoP). While market makers do not require a bridge in order to service their clients, brokers which are sending through orders to a liquidity provider or an electronic execution venue need a bridge to connect their trading platform to the interbank market.Bridges are used extensively in forex trading, specifically for Met Read this Term 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 Libor Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Read this Term at the end of 2022 and decide on a date to put an end to the 3-month sterling synthetic LIBOR.

The Dominance of SONIA

Moreover, the FCA’s decision to put an end to LIBOR 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 has exceeded £120 billion since 2018, and new SONIA lending surpassed £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 remain, 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 Governor of The Bank of England. “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.”