BankingCoronavirus to hinder Libor transition

Coronavirus to hinder Libor transition

Current market disruptions caused by pandemic could complicate market’s shift from Libor

Companies are struggling with their transitions away from the London Interbank Offered Rate (Libor) by the end of next year.

“Because of what has happened with the virus, companies are dealing with much bigger issues at the moment that will probably push back the deadline,” says Ian McNaughton, head of product UK at TreasuryXpress.

“The transition was going to start end of 2020. Now, it is being pushed out to 2021. In reality, you are probably going to see a few more extensions because, although it hasn’t really picked up speed yet, everyone will start to panic. Corporates have to liaise with the banks – they are waiting for the banks to drive the transition whereas is has got to be driven by everybody on every single level.”

Sarah Jordan, lawyer at Osborne Clarke says that complications have been added to the transition by the current state of the market.

“It is a huge administrative task and many lenders are still not well prepared. Lenders have been told that no new Libor products should be sold from Q3 of this year. We are already seeing some new Sonia products on the market, but they are not yet widespread in the syndicated loan market,” she says.

“The beauty of Libor is that, as a forward-looking rate, the financial director of a company knows what the interest payment on a loan will be well in advance of the interest payment date, which is critical for the successful management of cashflow. “

The FCA initiated the replacement of Libor in 2017 as it suggested market participants could no longer rely on the global benchmark due to the risk of banks manipulating rates and how well it can respond to certain market conditions.

Despite the current crisis, the FCA has stressed that firms should still prepare to phase out of Libor end of 2021.

In its statement, the regulator claimed that the switch from Libor to the new risk free rates remained a key objective that will “strengthen the global financial system” and promised to pursue preparations for the transition while acknowledging the effect of the coronavirus epidemic on the market.

The FCA said it is working closely with the Bank of England, the Working Group, and other international authorities to oversee the transition and address the impact of the present crisis on deadlines.

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