19 January 2021: Time has finally been called on LIBOR, dubbed the “world’s most important number”, as UK regulators say they will monitor activity to ensure the interest rate benchmark is no longer used by the end of 2021.

Businesses should have everything in place to transfer financial contracts to other rates, such as SONIA, the BoE overnight interest rate, said Edwin Schooling Latter, director of markets and wholesale policy at the Financial Conduct Authority (FCA).

LIBOR, the London Interbank Offered Rate, is the most commonly used interest rate benchmark to price or value an enormous range of financial products, including corporate and personal loans, mortgages, bonds and derivatives, underlying over $370tn of transactions around the world. 

The manipulation of the rate resulted in fines in the billions of pounds for global banks, causing regulators to step in and end its use. However, despite attempts to phase it out from 2017, the rate still underpins trillions of dollars in contracts globally.

The FCA, the UK LIBOR regulator, announced several years ago that it would no longer compel panel banks to provide quotes using the benchmark after December 31, 2021. The FCA also said last March that firms must assume that LIBOR would no longer be published after the end of 2021. That date has now been set in stone following an announcement from the FCA and the Bank of England. 

“The big issue is making sure LIBOR doesn’t slip off ICAEW member radars, because absolutely front of mind for the last few months has been COVID, and if that was priority number one, priority number two has been Brexit,” said John Mongelard, risk and regulation manager in the ICAEW Financial Services Faculty. 

It is very likely firms will have two financial exposures to LIBOR: lending and the derivatives used to hedge interest rates, Mongelard said, which will impact on almost all areas of their business. Many corporates hedge their loans with a derivative to counter interest rate risks, which would all previously have been tied to LIBOR. 

“You need to think about all your lending, how to move and manage it,” he said. “As a business, if you’re worried about cashflow and don’t know where the next payday is coming from, you may have loans based on LIBOR, which is the old rate. That needs to change by the end of the year.”

LIBOR compiler ICE Benchmark is also formally consulting on plans to stop publication of all sterling LIBOR rates at the end of 2021. Other deadlines related to the rate are also in effect, such as the ending of the use of LIBOR from the end of March for pricing loans that mature from 2022. 

“For most businesses, the bigger picture will be their lending and any hedging,” said Mongelard. “This is what we don't want ICAEW members to miss because they need to unwind all of this before the end of the year.”

Senior managers with responsibility for the transition should expect close supervisory engagement on how they are ensuring their firm’s progress relative to industry milestones, the FCA said. 

“As we move into the final year for sterling LIBOR transition, it is crucial that firms take action now to make certain they are prepared well in advance of the end of 2021,” said Andrew Hauser, Executive Director for Markets at the Bank of England.

More information for ICAEW members can be found on the dedicated LIBOR page of our website.