The Financial Conduct Authority (FCA) confirmed that Libor settings for sterling, euro, Swiss franc, Japanese yen, and the one-week and two-month US dollar settings will cease on 31 December 2021.  The remaining US dollar settings will cease after 30 June 2023. 

“Today’s announcements provide certainty on when the LIBOR panels will end,” said Nikhil Rathi, CEO of the FCA. “Publication of most of the LIBOR benchmarks will cease at the same time as the panels end. Market participants must now complete their transition plans.”

Market participants across the value chain have been transitioning to alternative benchmarks, including SONIA for UK sterling derivatives and SOFR for US dollar derivatives, in the last year.  

The end date comes alongside a feedback statement published by the ICE Benchmark Administration (IBA) on its Libor consultation, which it launched in November.  

The IBA said the “vast majority of respondents” were in support of the cease of publishing Libor settings at the end of 2021 and of the ceasing of other US settings in 2023. 

“Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system,” Bank of England governor, Andrew Bailey, commented. “With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.”

Research from the UK’s Investment Association last year suggested that asset managers had upped efforts to switch from Libor to alternative benchmarks, with 70% of its members reveling they had reduced their exposure to Libor in the last year. 

The FCA confirmed in July 2017 that it would no longer be supporting banks using Libor settings after the end of this year following years of allegations that the benchmark had been manipulated.  

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ICE claims it is the first venue to launch the SONIA options after confirming plans to launch the contracts in late October.

It first launched one-month SONIA futures in December 2017 and three-month SONIA futures in June 2018, which have since recorded a cumulative volume of more than £13 trillion notional. 

ICE SONIA futures trade alongside three-month sterling futures and options, with open interest standing at more than 17.6 million contracts.

ICE Futures Europe also facilitates trading in other alternative reference rates such as one month and three-month SOFR futures for US dollar derivatives, €STR futures for euro-denominated derivatives, and SARON futures for Swiss franc derivatives.

“ICE is where the market comes to hedge its exposure to Sterling-related interest rate risk and SONIA Options provide another tool to help the market transition from LIBOR and manage nonlinear risk,” said Steve Hamilton, global head of financial derivatives at ICE. “Throughout 2020, open interest in SONIA futures has grown three-fold as increasing parts of the market utilise SONIA to express their views on, and manage UK interest rate risk.”

The news follows ICE confirming in November that it had added dealer-to-client data from Tradeweb to its waterfall methodology for the ICE Term SONIA reference rates (ICE TSRR).

Also in November, the ICE Benchmark administration said it planned to consult on its intention to cease publication of Libor interest rates for sterling, euro, Swiss franc, and Japanese yen after 31 December 2021. 

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ICE Futures Europe will roll out options and mid-curve options based on three month SONIA index futures on 7 December, subject to regulatory approval.

ICE launched one month SONIA futures in December 2017 and three month SONIA futures in June 2018. The derivatives exchange revealed that since launching both products, cumulative volume in contracts has reached £11 trillion in notional, while open interest stands at a record £81 billion notional in three SONIA futures.  

“As markets take in the uncertain future of COVID-related stimulus policies, uncertainty around negative rates, and absorb economic outlook data, we have seen activity and open interest in three month SONIA futures grow to record levels,” said Steve Hamilton, global head of financial derivatives at ICE.

“SONIA options will build on this success and provide a marketplace for customers to manage and express a view on nonlinear risk in the sterling alternative rates market.”

SONIA is an alternative benchmark for UK sterling derivatives as Libor is gradually phased out. It is considered best practice as an alternative reference rate, following years of controversy and manipulation shrouding the Libor benchmark.

ICE Futures Europe also facilitates trading in other alternative reference rates such as one month and three month SOFR futures for US dollar derivatives, €STR futures for euro-denominated derivatives, and SARON futures for Swiss franc derivatives. 

Earlier this month, ICE launched a beta version of its GBP ICE Swap Rate for SONIA swaps through its ICE Benchmark Administration (IBA) business. IBA started publishing the beta version of the ICE Swap Rate for SONIA swaps following market feedback and consultation papers.

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Tradeweb said it is the first trading venue to facilitate the swap against gilt futures trade using the alternative risk-free rate SONIA benchmark. JP Morgan acted as the liquidity provider and worked in partnership with Tradeweb to launch the electronic execution for actively-traded SONIA swap versus gilt future packages.

Also known as an invoice spread, a swap versus future transaction is the simultaneous purchase/sale of a futures contract against a spot starting or forward interest rate swap. Invoice spreads are typically traded using Libor, but the rate will be phased out and replaced with SONIA for UK debt and derivatives by the end of 2021.

“We are pleased to be the first liquidity provider for electronic SONIA invoice spread trading on Tradeweb,” said Kari Hallgrimsson, co-head of EMEA rates trading at JP Morgan. “This is an important step in the development of the SONIA derivatives market, and demonstrates our ability to lead the benchmark transition for sterling interest rate swap contracts.”

Earlier this year in March, SONIA became the benchmark for sterling interest rate derivatives on Tradeweb’s interest rate swaps platform. The fixed income and derivatives trading platform provider said it has been working with market participants on developing tools and data to help with the shift of sterling swaps from Libor to SONIA.

It has also rolled out trading protocols for clients to engage with the SOFR alternative benchmark for US dollar derivatives and €STR for euro derivatives. Traders can use request for quote or request for market protocols and can upload IBOR portfolios into Tradeweb’s list trading mechanism for conversion into risk free rates.

“The launch of SONIA invoice spread trading on our platform adds transparency and efficiency to the execution of these packages,” added Bhas Nalabothula, head of European interest rate derivatives at Tradeweb. “Together with JP Morgan, we continue to build on our track record of collaborating with clients to advance electronic trading of interest rate swaps.”

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ICE said that IBA has started publishing the beta version of the ICE Swap Rate for SONIA swaps following market feedback and consultation papers.

IBA will publish daily indicative GBP SONIA ICE Swap Rate beta settings with tenors ranging from one to 30 years to allow users to evaluate the rates and submit further feedback.

The GBP SONIA ICE Swap Rate ‘Beta’ version is determined by using the published ICE Swap Rate ‘waterfall’ methodology and is available for the same tenors and at the same time as the current GBP Libor ICE Swap Rate.

“We are pleased to support the development and adoption of alternative rates by launching ICE Swap Rate settings for SONIA”, said president of ICE Benchmark Administration, Tim Bowler.

“IBA is working hard to provide products and solutions to help stakeholders transition efficiently to alternative rates. We expect to be able to launch ICE Swap Rate settings for other alternative, overnight rates as the relevant swaps markets develop.”

SONIA is an alternative benchmark for UK sterling derivatives as Libor is gradually phased out. It is considered best practice as an alternative reference rate, following years of controversy and manipulation shrouding the Libor benchmark.

In July, ICE launched the initial beta version of its ICE term SONIA reference rates (ICE TSRR), which measure average expected SONIA rates over one month, three months, and six-month tenor periods on a daily basis.

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LCH has registered its first SONIA/SOFR cross-currency basis swap between Bank of America and Lloyds Bank Corporate Markets via SwapAgent.

The UK clearing house said the trade was completed ahead of the upcoming discounting and price alignment interest transition to USD SOFR at LCH SwapAgent, which is scheduled for 16 October.

“This latest milestone for LCH SwapAgent demonstrates the service’s capability to facilitate a coordinated transition to risk-free rates for non-cleared OTC derivatives,” said global head of LCH SwapAgent, Nathan Ondyak. “This neatly complements our existing offering which is delivering operational and funding efficiencies to a growing community of members.”

SOFR and SONIA are the alternative benchmarks to Libor for US dollar and UK sterling derivatives. Both are considered best practice as alternative reference rates, following years of controversy and manipulation shrouding the Libor benchmark.

LCH added that the cross-currency swap between SwapAgent members Bank of America and Lloyds highlights its commitment to supporting industry efforts to reform reference rates.

“As a major participant in the sterling rates market, it is important for us to see liquidity develop in the new risk-free benchmark rates,” said head of CCY and USA at Lloyds Bank Corporate Markets, Richard Pattison. “We are happy to contribute to that developing liquidity and welcome the efficiencies SwapAgent brings to the un-cleared OTC derivatives market.”

SwapAgent has seen continued growth in volumes for its offering since launching in 2017, with US$1.12 trillion registered during the first half of 2020 and 18 members now using the service.

LCH has today received third country recognition from the EU markets watchdog to continue providing its clearing services to clients in Europe for 18 months once the Brexit transition period ends on 31 December.

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The buy-side trade association said investment firms have ramped up plans to move away from Libor to the Sonia (Sterling Overnight Index Average) benchmark, with a recent poll of Investment Association member firms showing that 70% had reduced their exposure to Libor throughout last year.

It also showed 65% already invested in Sonia-based instruments last year, and 75% had approved budget to complete the transition as planned. Around 25% of respondents had budgets related to the Libor transition of more than £2 million.

In January, the Bank of England, the UK’s Financial Conduct Authority and the Working Group on Sterling Risk-Free Reference Rates issued various documents and updated its roadmap, upon urging the industry to accelerate plans for the switch from Libor.

Describing 2020 as a ‘critical’ year for Libor transition, the update from UK authorities requested participants to cease issuance of cash products referencing Libor by the third quarter this year.

Market participants were also warned in March that the coronavirus pandemic could impact interim transition milestones of the move away from Libor. While the end of 2021 remains the target for firms to stop using the Libor benchmark, segments of the UK market, such as the loan market, have made less progress in the transition, the Bank of England said.

“Investment managers have made significant progress in the transition away from Libor to Sonia and other alternative reference rates,” said Galina Dimitrova, director for investment and capital markets at the Investment Association.

“With the FCA and Bank of England clear that Libor will cease to exist after the end of 2021, we strongly encourage investment managers, counterparties and vendors to work together in this final stretch to ensure a smooth transition, and reduce the reliance on LIBOR in all investments, operations and activities.”

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ICE Benchmark Administration has launched the initial beta version of the ICE term SONIA reference rates (ICE TSRR), which measure average expected SONIA rates over one month, three months, and six-month tenor periods on a daily basis.

Calculated via a waterfall methodology, ICE said the reference rates use tradeable bid and offer prices and volumes for eligible SONIA-linked overnight interest rate swaps on the central limit order books of BGC, TP ICAP and Tradition’s Trad-X. If the venues do not provide eligible input data for the first level of the waterfall calculation, the second level will use SONIA-linked futures data published on electronic venues.  

“We have heard feedback from many businesses, borrowers, and lenders, that they value having forward-looking term rates to provide certainty when calculating their interest expenses and other contractual payments in advance,” said Tim Bowler, president of ICE Benchmark Administration.

“ICE Benchmark Administration is working hard to provide tools to help the market transition to alternative rates and we will be ready to launch forward-looking term rates for other alternative overnight rates as market conditions allow.”

The exchange group is publishing beta rates for testing purposes in line with the UK working group on sterling risk-free reference rates (RFRWG). ICE will confirm in due course when the TSRR will be made available as a benchmark for financial instruments.

Authorities in the UK, including the RFRWG, urged market participants earlier this year to accelerate the shift to SONIA from the controversial Libor benchmark before it is axed at the end of 2021. Describing 2020 as a ‘critical’ year for Libor transition, the measures from the authorities requested participants to cease issuance of cash products referencing Libor by the third quarter this year.

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In a statement, the UK authorities said that while the end of 2021 remains the target for firms to stop using the Libor benchmark, segments of the UK market, such as the loan market, have made less progress in the transition.

As a result of the impact of coronavirus, the Bank of England and FCA confirmed some interim transition milestones would likely be affected due to disruption to market participants’ transition efforts.

“The transition from Libor remains an essential task that will strengthen the global financial system,” the statement said. “Many preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms… It is likely to affect some of the interim transition milestones.”

Just months ago, the authorities published various documents and updated its roadmap for the shift towards the Sonia (Sterling Overnight Index Average) benchmark. Describing 2020 as a ‘critical’ year for Libor transition, the measures from the authorities requested that participants cease issuance of cash products referencing Libor by the third quarter this year.

The controversial Libor benchmark is being phased out following years of scandal, alleged manipulation and a decline in activity, and is scheduled to be replaced with Sonia by the end of 2021. Twenty major banks agreed to continue making submissions to Libor until then to ensure a smooth transition as the benchmark is phased out.

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The Bank of England, the Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have issued various documents and updated its roadmap for the shift towards the Sonia (Sterling Overnight Index Average) benchmark. 

Describing 2020 as a ‘critical’ year for Libor transition, the latest measures from the authorities request that participants cease issuance of cash products referencing Libor by the third quarter this year, with market makers urged to switch the convention for sterling interest rate swaps from Libor to Sonia on 2 March.

“The time to act is now: with the tools published today and the support of the official sector domestically and internationally, market participants have what they need to leave Libor behind,” a statement from the Bank of England, the FCA and the RFRWG said. 

The controversial Libor benchmark is being phased out following years of scandal, alleged manipulation and a decline in activity, and will be replaced with Sonia by the end of 2021.  Twenty major banks agreed to continue making submissions to Libor until then to ensure a smooth transition as the benchmark was phased out.

Research and studies have suggested that the buy-side is largely unprepared for the shift from Libor, with one study early last year stating that a significant 75% of asset managers still have contracts which reference Libor and a life span beyond the 2021 deadline. The volume-weighted proportion of interest derivatives referencing Libor that go beyond that date at the time the study was published was thought to be around 40%.

“In most products, market participants have made impressive progress in moving away from LIBOR. The time has come to draw to a close its remaining use,” Christopher Wooolard, executive director of strategy and competition at the FCA, commented. “The Bank and the FCA have written to major banks and insurers to set out our expectations for transition progress during 2020… Firms must act now to help meet these targets and ensure a smooth transition to alternative rates by end-2021.”

The FCA added that the market for Sonia derivatives is already well-established, with average cleared over the counter Sonia swaps exceeding £4.5trillion each month over the past six months. The traded monthly notional value is also now broadly equivalent to Sterling Libor. 

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