FCA Announces End of LIBOR by 2021

The UK Financial Conduct Authority (FCA) has announced that it will no longer persuade or compel banks to submit rates for the London Interbank Offered Rate (LIBOR) after the end of 2021. The decision marks the beginning of the end for the benchmark, which underpins more than $350 trillion in financial instruments globally, including derivatives, corporate loans, and securitizations. According to the FCA, the move was necessitated by a lack of active underlying transaction data to support the benchmark, which made it vulnerable to the kind of manipulation that led to prior scandals and billions in fines.

The global transition away from LIBOR represents a profound operational and legal challenge for financial institutions and corporate borrowers. It requires a massive repapering exercise to amend legacy contracts that reference the outgoing rate. Regulators are spearheading the shift to alternative, more robust reference rates, such as the Sterling Overnight Index Average (SONIA) in the UK and the Secured Overnight Financing Rate (SOFR) in the US, which are based on observable overnight lending transactions. Market participants must immediately begin to assess their LIBOR exposure and prepare for the adoption of the new benchmarks.