Monday, December 21, 2020
The current deadline for the cessation of the London Inter-Bank Offered Rate (LIBOR) is the end of 2021. The transition away from LIBOR is, however, a moving target, and its status is constantly changing.
Why Move Away from LIBOR?
LIBOR and other inter-bank offered rates rely on liquidity in the relevant market, where a shortfall in supply causes an inaccurate reflection of that rate. Coupled with the 2012 LIBOR-rigging scandal, there has been a very public move from LIBOR towards Risk-Free-Rates (RFRs).
Alternatives
Working groups, think tanks and interested parties have mobilised globally to deal with the transition. In the United Kingdom, the Working Group on Sterling Risk-Free Reference Rates’ frontrunner is the Sterling Overnight Index Average (SONIA), an average of the rates at which banks pay to borrow sterling from other financial institutions overnight.