The London Interbank Offered Rate is a benchmark rate offered by most of the lending banks. The LIBOR rates serve as the base for calculating interest rates.
It's important for users of LIBOR to adopt and ensure a smooth transition in the coming years, if LIBOR gets phased out. Therefore, there is an advice to work on planning transitions to alternative reference rates that are grounded on actual transactions.
If reports are to be believed, the financial world could be bidding farewell to our well known friend LIBOR by the end of 2021 & could be welcoming SONIA a more interesting name!
Libor, tarnished by the credit crunch and an axiom for corruption might be on its way out as per investment firm, Janus Henderson’s Head of Interest Rates, Mr.Mitul Patel.
"Sonia is likely to become to the new bench benchmark rate, and although the transition will be lengthy and difficult, it now appears inevitable," Janus Henderson's Patel said.
Libor is reportedly used to price transactions worth over US$300 trillions across the world; this could be scrapped by the end of 2021 and replaced with “SONIA”, rate based on actual transactions.
Mr. Bailey, Chief executive of Financial Conduct Authority (FCA) said, “the change needs transition period of four to five years to obviate the risks & financial impacts associated with an abrupt change.”
“The Libor benchmark administrator(ICE Benchmark Administration) and associate banks could continue to submit Libor as they do now, but the FCA could no longer oblige banks to submit rates and there was no guarantee it would survive”, Bailey said.
"It is not only potentially unsustainable, but also undesirable, for market participants to rely indefinitely on reference rates that do not have active underlying markets to support them," Bailey mentioned.
He also stated that the benchmark rate hasn’t exactly translated to transactions as expected."It is because the underlying market that Libor seeks to measure, the market for unsecured wholesale term lending to banks is no longer sufficiently active."
There was a little prospect of the markets becoming substantially more active in the near future, according to Mr Bailey.
The Bank of England has apparently started fine tuning its overnight sterling funding rate Sonia, which is relatively tougher to be manipulated as it is based on actual transactions, unlike LIBOR.