Discontinuation of LIBOR
LIBOR (the London Interbank Offered Rate) is a series of interest reference rates which underpin and are used as a basis for calculating many interest rates for financial products. LIBOR rates are produced for different currencies (including the pound sterling) and for a variety of periods, including ‘overnight’ or longer-term periods of one, three, six or twelve months. (Interest rates for periods longer than overnight are often referred to as “term rates”). LIBOR may be used in both financial and non-financial contracts.
It is likely that LIBOR will be discontinued in all its forms after the end of 2021, and users of LIBOR should prepare for this.
This is because market and regulatory changes have resulted in the number of transactions upon which LIBOR rates are constructed significantly decreasing in recent years.
In the UK an alternative reference rate, SONIA (the Sterling Overnight Index Average), will be used as a replacement in many cases. In circumstances where an overnight reference rate is required, SONIA (which is an overnight rate) may be used as a direct LIBOR substitute.
In circumstances where a term reference rate is required (for example, because a term LIBOR rate was previously used) a compounded version of SONIA may be used and consideration is being given to the most suitable way to calculate term SONIA rates, with a methodology using a compounded version of SONIA seen by many market participants as attractive. Alternatively, your bank or lender may choose an alternative rate such as the bank base rate.
During 2020, products referencing LIBOR are likely to cease to be available. Throughout the year, you may find that there are an increasing number of available products linked to alternative rates, where previously they were linked to LIBOR.
- Make an inventory of your LIBOR exposures
- Analyse and assess affected products
- Consult with their finance provider
- Review alternatives and their pros and cons (SONIA is only one option of several
- Review individual contracts to identify if fallback clauses explain what happens in the absence of LIBOR • consider other elements such as systems, accounting and tax matters
For further information and guidance, download a PDF version of UK Finance’s LIBOR guide for business customers here