In the past few weeks, there have been several announcements and speeches which have great significance for the financial markets in the UK but there doesn’t seem to have been a commensurate reaction in terms of column inches.

The first announcement, unsurprising but nonetheless very significant, was made by Chris Salmon, Executive Director Markets at the Bank of England to confirm that the working group set up by the Bank had recommended that SONIA should be used as the sterling risk free benchmark rate in place of LIBOR. The importance of this decision cannot be underestimated as the transition to SONIA from LIBOR will not be easy, nor is it likely to happen any time soon. That LIBOR needed to be replaced was inevitable and necessary in most people’s minds. SONIA meets the principle of being transaction-based (LIBOR rates are currently judgement-based) but the decision does raise the question as to whether a derivative instrument is the most appropriate one to use for derivatives contracts. The working group also investigated an alternative rate based on secured transactions and many in the wider marketplace still view that as a better option, particularly in light of the second important announcement made by the FCA on 27th July.

In a speech at Bloomberg’s offices in London, the Financial Conduct Authority’s CEO Andrew Bailey announced that LIBOR would not be sustained by the FCA’s regulatory powers beyond 2021. It is the FCA’s view that interest rate benchmarks should be based on transactions, not judgements. The market will be pleased with the announcement because at least it gives some certainty as to when LIBOR as a regulated benchmark will end. As Mr bailey remarked, it is now up to the markets to decide which benchmarks to adopt going forward based on which would be most appropriate for different business models, using a one-off set of term credit spreads which could be added to the near risk free rate such as SONIA. It leaves open the possibility of new reference rates being introduced by the market, most probably one which reflects a transaction-based secured rate. In any event, the FCA expects work now to begin in earnest on planning transition to alternative reference rates that are based firmly on transactions.

The third announcement was the appointment of Sir Dave Ramsden to the position of Deputy Governor Markets & Banking at the Bank of England. He is currently Chief Economic Advisor to HM Treasury and will take up his new position on 4th September.

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