Industry Updates

Investors progress away from LIBOR to SONIA

Transitioning before the updated deadline of 1 January 2022

George Geddes

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Investment managers have made significant progress in switching from LIBOR to SONIA, according to data from the Investment Association.

The European Commission recently proposed a number of amendments to the Benchmark Regulation including providing alternatives to critical benchmarks, such as LIBOR, that are in the process of closing.

The purpose of providing a suitable alternative is to ensure minimal disruption is caused to the financial stability of the European Union.

The IA and EY have released a report which outlines steps firms should be taking to complete the transition.

The steps include:

  • Monitoring industry conventions and market liquidity by asset class and jurisdiction to ensure firms transition plans align with global developments

  • Assessing opportunities and risks for clients and incorporating this into the transition strategy

  • Embedding conduct risk and controls across all transition-related activity in line with regulatory expectations

  • Communicating with clients, counterparties and vendors, identifying concerns, and evidencing how these have been solved in the best interest of clients

  • Updating contracts and documentation across the firm to reflect the shift to SONIA and risk-free replacement rates for other currencies

  • Ensuring operational readiness for the transition with both internal and third-party providers

The IA says that investors are ‘stepping up’ their plans to move to SONIA, a risk-free rate, by the deadline of 1 January 2022.

At the end of 2019, 92% of IA members had assessed their exposure to LIBOR, according to a study carried out by the body.

The survey also found 70% of respondents had reduced their exposure to LIBOR last year in tandem with 65% having invested in SONIA-based instruments.

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Galina Dimitrova, director for investment and capital markets at the Investment Association, commented: “Investment managers have made significant progress in the transition away from LIBOR to SONIA and other alternative reference rates.

“With the Financial Conduct Authority (FCA) and Bank of England clear that LIBOR will cease to exist after the end of 2021, we strongly encourage investment managers, counterparties and vendors to work together in this final stretch to ensure a smooth transition, and reduce the reliance on LIBOR in all investments, operations and activities.”

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