UK Regulators Urge Sterling Derivatives Providers to Switch from LIBOR

With the end of LIBOR drawing closer, the FCA and Britain’s central bank are encouraging market participants to actively transition from referencing LIBOR rates in their sterling non-linear derivatives.

In this respect, the mega regulators recommend adopting new quoting conventions for inter-dealer trading based on SONIA, effective May 12. Instead of interbank offered rates, this step facilitates a further shift in market Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term toward SONIA, bringing benefits for a wide range of users as they move away from LIBOR.

This shift is expected to boost liquidity in these products, which will aid relevant providers in achieving the Working Group’s key milestone of ceasing GBP LIBOR-linked non-linear derivatives by the end of Q2 of 2021.

The FCA and BoE have been taking steps to promote the switch from LIBOR to SONIA. Throughout the last few months, they actively provided guidance to lenders, borrowers and investors who are amending their documentation to reference SONIA.

Earlier this month, the UK regulators announced final dates for the cessation of all London Interbank Offered Rate (LIBOR) benchmark settings, currently published by ICE Benchmark Administration (IBA).

The FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative after December 31, 2021.

The news comes as the scandal-ridden LIBOR is set to retire at the end of 2021 as the world’s most important benchmark following a multi-year rigging scandal by a major lender since the 2008 financial crisis.

Areas of Significant Concern

Additionally, they were a dozen bankers that have been convicted on Libor rate-rigging charges in a series of prosecutions brought by global regulators, which ultimately prompted an overhaul of the rate-setting rules. Prosecutors alleged that bank traders dishonestly manipulated the rate to benefit their own trading positions, nudging them up or down while ignoring rules that they should be set independently.

LIBOR, which underpins more than $300 trillion in derivatives and other instruments, is set to be replaced worldwide with the Bank of England’s Sonia rate for sterling-denominated Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term, loans and futures.

Global regulators urged market participants earlier last year to accelerate the shift to the Sonia overnight rate before it ceases issuance of cash products, referencing Libor by the fourth quarter.