London Conversion Rate: A Guide to the Transition from LIBOR

As part of its efforts to improve the stability and resilience of the financial system, the Bank of England has announced a new London conversion rate that will come into effect on 31 January 2022. This change is intended to provide firms with sufficient time to prepare for the transition.

The new clearing obligation for OIS (Overnight Indexed Swaps) that reference TONA (Term Overnight Index Average) was published by the FCA (Financial Conduct Authority) and is aimed at ensuring a smooth transition from LIBOR (London Interbank Offered Rate). The Bank of England and the FCA will continue to support firms as they actively transition any outstanding LIBOR exposures.

The industry-led Working Group on Sterling Risk-Free Reference Rates has been established to lead this work in sterling markets. The group produces guidance and support for both financial and non-financial firms to help them with the transition. The alternative to LIBOR is the Sterling Overnight Index Average (SONIA) benchmark, which is produced by the Bank of England.

Risk-free rates (RFRs), such as SONIA, are robust alternatives to LIBOR that are available to replace it. Synthetic US dollar LIBOR settings will cease at end-September 2022, while the 1-, 3-, and 6-month settings will continue on a synthetic basis in line with FCA announcements.

In addition, three yen LIBOR settings will continue for the duration of 2022 on a 'synthetic' basis. The low volume of underlying transactions means that LIBOR is no longer sustainable, as it has since the global financial crisis in 2008-09. As interest rates for financial contracts around the world are determined by LIBOR, its replacement with alternative benchmarks is crucial for maintaining stability in the financial markets.

The Bank of England and the FCA will continue to provide guidance and support to firms as they transition away from LIBOR. The new London conversion rate marks an important step towards a more resilient and stable financial system, and it is essential that firms take action to prepare for this change.

By , firms must have completed their preparations and begun using the new London conversion rate. This will ensure a smooth transition to the alternative benchmarks and maintain stability in the financial markets. The Bank of England and the FCA will continue to monitor progress and provide updates on the transition process.