BoE forum highlights transition away from LIBOR

William Dudley, President and Chief Executive Officer at NY Fed said:

“The transition away from LIBOR represents a significant risk event for firms of all sizes, and they should actively manage this transition through their existing frameworks for identification, management, and mitigation of risk.  Supervisors should continue to support this objective by ensuring that all firms are aware of the transition and that LIBOR-related issues are being addressed in a way that is commensurate with a firm’s exposures and risks.  More broadly, the official sector will continue to push market participants to take all necessary steps to mitigate the risks to financial stability from a disorderly transition.”

Read the full speech

Mark Carney, Bank of England Governor, said:

I want to briefly touch on one of the biggest challenges facing us right now – the transition to Risk Free Rates. The focus now is on transition. Market participants in every sector and market that use Libor now need to come together to identify and resolve issues, change business practices, and adopt alternative benchmarks.

In sterling, over 90 institutions, including banks, law firms, corporates, asset managers, trade associations and infrastructure firms, are directly involved in this effort supported by the Bank and FCA. Transition to SONIA will bring a number of benefits. Market participants can have the confidence that SONIA faithfully represents conditions in a deep underlying market. They can also be assured that SONIA’s design is robust to future changes in money markets because, if necessary, SONIA’s data inputs can evolve.

Near risk-free rates like SONIA are a better reflection of the general level of interest rates than Libor – which is affected by fluctuations in the perceived credit quality of banks (as well as other technical factors as seen recently). Interest payments for benchmark users should be less volatile as a result, especially in times of stress, and products referencing SONIA should provide a better hedge for duration risk.

Over time the private sector will develop a wider range of products referencing SONIA. Futures contracts have already been created. We can expect Floating Rate Notes and loans referencing SONIA to follow. The end point should be an ecosystem for interest rate markets which has an altogether healthier foundation than at present. Developing the infrastructure around the near risk-free benchmarks globally, and assisting market participants in dealing with legacy Libor portfolios, is a significant opportunity for  innovation. Firms here in London are well placed to take advantage.

Read the full speech

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