JOHANNESBURG – Financial institutions and corporates need to prepare now for the transition to new alternative interest reference rates. Assessing the potential impacts of the transition away from LIBOR will help to get ahead of challenges and realise the potential benefits.
The London interbank Offered Rate (LIBOR) is being replaced. Currently, LIBOR is the benchmark for over US$350 trillion in financial contracts all over the world. The impact of the transition from LIBOR will be far-reaching for financial services firms, businesses and customers alike. The transition is expected to be more far-reaching than that of Sarbanes-Oxley, MiFID II, and other major changes to the financial landscape.
After the financial crisis there were concerns around LIBOR, particularly in the wake of several traders that were accused of colluding to rig the rates. These concerns related mainly to the way in which LIBOR was set which is based on the professional judgement of contributing banks as opposed to actual transactional data. In 2017, the UK’s Financial Conduct Authority (FCA) announced that it would no longer compel panel banks to make LIBOR submissions after 2021.
Working groups from around the world have proposed alternative reference rates or are working to substantially strengthen existing rates. Five reference rates are emerging as an alternative to LIBOR. These alternative rates differ by region, currency, tenor, and basis. SOFR, overseen by the Federal Reserve Bank of New York, and SARON, administered by Zurich-based SIX Exchange, are secured rates, while SONIA (Bank of England), ESTER (European Central Bank) and TONAR (Bank of Japan) are unsecured.
How the LIBOR transition should take place