Libor, one of the main interest rate benchmarks used in global financial markets, is a measure of the average rate at which banks are willing to borrow wholesale, unsecured funds. It underpins financial contracts worth trillions of pounds, including derivatives, bonds and loans.
But the way banks fund themselves has changed, leaving very few transactions in the underlying market Libor measures. This means Libor is not a reliable benchmark for interest rates and is expected to be discontinued after end-2021.
Users of Libor need to prepare by transitioning to alternative, more robust benchmarks, such as overnight risk-free rates.
In sterling markets, the primary alternative is SONIA, which is published by the Bank of England and based on an average of over £40 billion of transactions each day. This supports a well-established and growing derivatives market, and has rapidly become the benchmark of choice for floating rate bonds over the last year.
Despite the progress in establishing alternative reference rates and in building these new markets, much more work is needed to complete the transition. Many new contracts maturing beyond 2021 continue to reference Libor.
In particular, in loan markets, Libor-linked lending continues to dominate. And many new long-dated derivative contracts also continue to reference Libor, with steady growth in the stock of cleared sterling Libor swap contracts maturing beyond 2021 (Chart A).