LIBOR: The End Game -

Since the announcement on July 27, 2017 by the UK Financial Conduct Authority (the FCA) that the LIBOR rate would be phased out after 2021, much has been written about the complications of switching over from LIBOR to an alternative rate. It is reported that LIBOR is tied to over $350 trillion in derivatives, corporate bonds, and other financial products (such as adjustable rate mortgages). Although efforts to strengthen LIBOR have been ongoing, there are simply not enough underlying transactions upon which a LIBOR quote can be reliably based, according to FCA Chief Executive Andrew Bailey.

Killing off LIBOR inevitably raises questions about how a transition to a replacement rate would work. For GBP LIBOR, the Sterling Overnight Index Average, or SONIA, has been put forth as a replacement. One might question whether SONIA is a perfect fit for replacing a LIBOR instrument, as SONIA is solely an overnight rate, while LIBOR has a range of tenors from overnight to 12 months.