A broad-based transition to more robust overnight risk-free rates can provide the safe descent from Libor we set out to achieve, to a more resilient and transparent financial system. [10] Active and liquid underlying markets underpinning overnight rates have demonstrated resilience and we expect liquidity to move to these markets. [11] But there are also specific and limited use cases where forward-looking term rates may help facilitate this journey. We have seen constructive engagement in the UK. In 2018 the RFRWG surveyed the sterling market – and to be honest, we received a mixed response on the role of term rates, but with a small majority supporting a limited role for them. [12] The UK authorities have been supportive of the development of forward-looking term SONIA rates for limited use in cash markets. These rates have now been available for use in sterling contracts since January. [13] But while a narrow majority of the market made the decision to support the development of those rates, a broader consensus has firmly endorsed the limited use case for such rates. It has done this through the RFRWG but also through the FICC Markets Standards Board (FMSB) that has published a proposed market standard that considers limited use cases where there is a robust rationale for use of forward term SONIA, to meet specific needs, such as in trade finance and Islamic finance products. [14] Let me be clear – forward-looking term rates can support transition.
Well the summit, or summits that are the cessation dates for Libor are now clearly on the horizon with the FCA announcing earlier in the year that Friday 31 December 2021 will be the final publication date for panel bank sterling, Japanese yen, Swiss franc and euro Libor rates along with a number of lesser used US dollar tenors. The remaining US dollar tenors will cease in mid-2023. These summits have been on the horizon for over a decade and have been well signposted but they are now clearly visible, but as any climber will tell you the hardest part of mountaineering is often the descent. It can often be more treacherous than the climb. So with the market having definitive dates for the end of Libor – I am going to focus my comments today on descending safely – remembering the important role benchmarks play in the financial system and why financial firms and borrowers would be well served in choosing the most robust alternative reference rates that meet their use case. Transition from Libor was always going to be challenging given its widespread use, but to those looking for an easy descent by substituting Libor for credit sensitive rates that do not address all of its fundamental weaknesses, they risk much of the good progress that has been made. While these rates may offer convenience as a short-term substitution, they present a range of complex longer term risks.