Introduction

Global regulators such as the UK’s Financial Conduct Authority have indicated that bank’s should start to replace LIBOR with an alternative. This is important and will impact not just the banking industry but possibly you as a customer, as many contracts between a customer and bank reference LIBOR.

As we move away from LIBOR BLME will be approaching our customers to explain what steps we are taking to replace LIBOR. LIBOR may form part of the overall rate charged or offered in agreements you have with BLME. We are committed to ensuring the transition away from LIBOR does not negatively impact you. The UK regulators have been clear that customers should not be commercially disadvantaged through this process.

BLME is exploring how we will introduce an alternative to LIBOR for future deposit and financing products and services.  

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is one of a number of Interbank Offered Rates (IBORs) that are widely used in the global financial markets. It is published by the Intercontinental Exchange Benchmark Administrator and is based on submissions by a panel of large banks using available transaction data and their expert judgement.

It is used as a benchmark to set interest and profit rates across a number of financing arrangements such as mortgages and commercial loan agreements, and to a lesser extent, deposits. It is also used for banks' and other financial institutions’ own funding and capital needs.

LIBOR is supposed to provide an indication of the rate at which each panel member can borrow unsecured funds in the London interbank market for a given period, in a given currency. An average based on these submissions is published on a daily basis and used by the global financial markets.

Why are we moving away from LIBOR?

Since the Financial Crisis we have seen a significant decrease in the transactions which underpin LIBOR. A further decrease is expected which would result in LIBOR being mainly set through the expert judgement of a small number of Banks.

A replacement to LIBOR will be based on actual transactions providing users with transparency without the current reliance on expert judgement.

What will replace LIBOR?

The regulators and financial services industry are looking at using near-Risk Free Reference Rates (RFRs). These daily published rates based on large volumes of actual transactions will represent real-world rates of return on investments with near zero risk. Exactly which RFRs will be used in which products may yet be subject to change, however the current thinking suggest the following:

 

Replacement

Recommendation

United Kingdom

(GBP)

 

SONIA

SONIA, an unsecured overnight rate calculated by the Bank of England from eligible transactions reported to them via their sterling money market daily data collection process in accordance with form “SMMD”. Reformed SONIA has been published since April 2018

European Union

(EUR)

€STR

The ECB announced on the 13th September 2018 that the private sector working group had recommended €STR as the alternative Euro risk-free rate. €STR reflects wholesale Euro unsecured overnight borrowing costs of Euro area banks and is expected to be published from 2nd October 2019

United States

(USD)

SOFR

SOFR, a new, broad US Treasuries repo financing rate published since April 2018

Japan

(JPY)

TONAR

TONAR (Tokyo Overnight Average Rate), an uncollateralised overnight call rate

Switzerland

(CHF)

SARON

SARON (Swiss Average Rate Overnight), which references actual market transactions in the Swiss Franc interbank repo market (i.e. secured)

 

The above table is just one set of alternative rates to LIBOR. Official working groups and the finance industry at large are still discussing others which may be more convenient for some customers to use and to incorporate in their own financial requirements.

What do I need to do?

Nothing, BLME will continue to provide you with updates on the replacement to LIBOR. You should receive another communication around the middle of 2020.