As LIBOR cessation countdown enters the final 6-months – Where do UK businesses stand now?
With less than 6 months to now go until LIBOR’s cessation, there is currently a cautious sense of optimism with regards to reaching the deadline in a healthy and prepared manner for many market participants.
Working bodies and regulators have for some time of course been advocating the need for transitional efforts to be increased in time for the December deadline, and following the FCA’s announcement of March 5th2021, LIBOR’s cessation became a tangible goal for many businesses to focus towards. The announcement provided market participants with much anticipated clarity by announcing the dates for the cessation of publication of, and non-representativeness of, various settings of LIBOR[1].
While many have turned to alternative benchmark rates, there are still challenges faced by many firms who are behind in their transitional efforts.
So exactly where is the market with regards to the looming deadline? And what should your firm do if they too are struggling to keep pace with the requirements to meet key-dates in this transitional process?
LIBOR cessation developments in the UK
Compared to the USD LIBOR cessation deadline (which is currently set as a date of June 23, 2023), GBP LIBOR has recently seen a noticeably significant shift towards alternative rates.
This has been evidenced due to the currency ceasing at the end of 2021, where uptake of alternatives has taken place in recent months.
Since April this year, firms were instructed to stop issuing any new LIBOR linked loans, securitisations, and bonds. Many borrowers have opted to use the Bank of England base rate (BBR) due its simplistic nature of replacement, which is easy to understand, especially for borrowers.
SONIA has also been widely adopted and as it is a forward-looking rate, many have found explaining this rate to their customers an easy task given that their repayment will be for the three months following their quarterly reset rate.
In terms of the loan markets, there has also been increased transitional movement. In June 2021, we witnessed UK borrowers receiving signed loans that are SONIA indexed, highlighting the fact that key players are already comfortable issuing these types of loans.
The derivates market has also seen a speedy move away from LIBOR with an increase of SONIA swaps over the last few months.
What are the recent key issues that have arisen?
Many businesses are raising alarms as the transition process of late has seen an array of issues, ranging from a lack of liquidity for both over the counter and exchange-trades to hedging uncertainty and accounting standards with new RFR’s, as well as volatility and negative interest rates for RFR’s [2].
It’s clear that firms need more clarity regarding what should be a priority for them right now, and where they should be dedicating their time, money, and resource.
The big concern for many companies of course lies not only in the lead up to the deadline, but also the post deadline period, and primarily the fear of possible negative interest rates.
What does your business need to focus on right now?
Firstly, contact your clients, now.
Regulators have been clear in stating that the time to act is now and have urged firms to not wait to the last minute to speak with their clients.
The FCA noted that all businesses with existing loans in sterling should already have heard from their lenders about the transition, and those currently seeking a new or refinanced loan should be offered a non-Libor alternative.
Banks and other applicable firms will need to ensure that any changes made to any LIBOR indexed product, will need to be communicated to all their customers.
All customers will also need to understand any change that occurs, and if this is not done in the appropriate manner, banks and other lending firms could face serious legal implications due to misinforming, poorly updating, or not clearly discussing the transition process with their customers.
How can Momenta help you?
Momenta are a global contingent resource solutions firm, and for over 30 years we have been partnering with companies in the financial services, legal, technology, and training and development sectors to cost effectively provide the right people, with the right skills, at exactly the right time.
Momenta will provide you with additional resource for the relevant key areas of the LIBOR transition process, allowing you to focus on the strategic oversight of the project while we help to implement your vision.
This flexibility allows you to ensure that there is always the right balance to your team, delivering a far more effective solution that will benefit the results delivered to your client.
Momenta also specialises in scaling resource requirements up and down during the lifetime of a project to meet all key requirements, whilst helping to maintain cost control in resource delivery capacity and capability.
Given the mammoth task ahead for UK businesses in the LIBOR transition process, Momenta can provide fully built teams to support in all key disciplines, including:
- Identifying the contracts that need to be swapped
- Re-papering according to an appropriate index rate
- Reviewing fallback language
- Calculating the fluctuated pricing with each contract due to the new IBOR attached to any calculation or swap
- Contract negotiation and review
- Communications to the end customer regarding their new rates
Additional skilled and experienced resource will help you to avoid wasted time and help your clients transition their contracts to a new index on-time, efficiently, and effectively.
