Financial markets should start accelerating efforts to ditch Libor in favour of the Bank of England’s revamped interest rate benchmark being launched next week, a senior BoE official said.
Last year, banks and other market participants in London backed the daily Sonia or Sterling Overnight Index Average as a substitute for sterling-denominated Libor to price trillions of pounds in swaps and derivatives contracts. Sonia was run by a trade body in the past but from Monday it will be calculated and published by the BoE and based on transactions that represent about 90 percent of the market. Market participants have been waiting for the BoE to make Sonia more robust before ditching Libor and shifting trillions of pounds in liquidity.
The New York Federal Reserve began publishing its dollar Libor replacement, the Secured Overnight Financing Rate or SOFR, on April 2, but has suffered calculation hiccups. Sarah John, Sarah John, head of the BoE’s sterling markets division, said data gathering for the revised Sonia has been tested with a “shadow” benchmark produced in recent weeks: “Some of the issues that happened in the U.S. shouldn’t happen to us.” John said.
She expects new products will help to build up Sonia liquidity, including loan and bond market products that currently reference Libor. John sees little excuse not to switch to Sonia when it comes to new business but legacy Libor contracts present a challenge because it was difficult to devise a Sonia rate stretching out months into the future as there is no real market to underpin it and she wants to avoid benchmarks based on quotes or estimates rather than actual transactions.