On 21 November 2019, the FCA published a speech given by Edwin Schooling Latter, Director of Markets and Wholesale Policy on the next steps in the transition from LIBOR.

In his speech, Mr Schooling Latter outlines key next steps in the sterling swaps and loan markets. In these markets, the FCA will be encouraging market makers to make SONIA the market convention from Q1 2020. However, the FCA does not rule out more sterling LIBOR swap transactions for those who have a particular reason to prefer LIBOR. Mr Schooling Latter notes that LIBOR continues to be common among corporate lending, including syndicated loans. The Working Group on Risk-Free Reference Rates has set a target of Q3 2020 to stop new lending using LIBOR. As a result of this, the FCA expects significant infrastructure and documentation preparation, customer communication and staff training exercises for some banks.

The FCA also raises concerns that prudential and conduct risks of continuing to rely on contracts that reference LIBOR beyond end-2021 are rising. It will no longer be credible for regulated firms to claim they did not know that LIBOR might not survive this date.

In terms of global markets, Mr Schooling Latter describes how LIBOR could cease or fail the Benchmarks Regulation ‘representativeness’ test at end-2021, and how robust contractual fall back triggers can protect market participants from risks in both scenarios. He later goes on to discuss the consequences of LIBOR becoming unrepresentative which include difficulties in calculating a dynamic credit spread for every business day and the unpredictable behaviour of the rate closer to the “end-game” of LIBOR. Mr Schooling Latter ends his speech by repeating that the best way to avoid LIBOR-related risks is to move off LIBOR altogether. For those not ready to transition from the benchmark to SONIA or equivalents yet, contractual fall backs offer a safety net.