Bank of England: Libor System

Lord Tunnicliffe Excerpts

Thursday 17th November 2022 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I congratulate the noble Lord, Lord James of Blackheath, on securing this short debate and hope that he has not taken the shortness of today’s speakers’ list to heart.

As I understand it, the sterling Libor benchmark was wound up at the end of 2021. The Financial Conduct Authority continues to require the ICE Benchmark Administration to publish synthetic one-month, three-month and six-month sterling and yen rates. The yen rates will end this year, while the one-month and six-month sterling rates will likely cease at the end of March 2023. In its announcement of those dates, the FCA said it considered exposure to those sterling settings to be low. A limited number of US dollar rates will also be available until mid-2023, with those figures calculated using panel bank submissions rather than involving the IBA.

While the transition away from Libor affected a significant number of businesses, and continues to affect some, its phasing out was well trailed. Guidance was available from organisations including the Association of Corporate Treasurers, the Confederation of British Industry, the Institute of Chartered Accountants in England and Wales, and UK Finance. This helped many to prepare for the switching-off of the formal Libor rates last year. Various alternatives to Libor are now widely used, including the sterling overnight index average, SONIA, maintained by the Bank of England. SONIA is by no means a new measure, having been introduced back in 1997, but it has been subject to reform in recent years. The New York Federal Reserve maintains its own measure, the secured overnight financing rate, while several other rates are available to financial institutions and businesses. These alternatives are collectively known as risk-free rates and have been described by the Bank as “robust”.

Of course, not everyone has successfully transitioned away from Libor and some entities with so-called tough legacy contracts have found the process especially difficult. We had several debates on the Government’s approach to these contracts during the passage of the last financial services Bill. The subject was also covered by the critical benchmarks Bill, which sought to provide greater certainty around legacy contracts. However, with so much having happened in domestic and global economic terms since those Bills made it on to the statute book, can the Minister update us on any additional steps taken by the Treasury and regulators to assist those who were unable to transition on time? I am not sure how easy it is to pull all this data together, but I presume somebody has responsibility for it.

At present, unless I have missed a subsequent update from the FCA, no determination has been made on the winding-up of the three-month synthetic sterling rate. Firms’ exposure to that rate is felt to be higher than the one-month and six-month equivalents, raising the prospect that the synthetic rate may be provided beyond March 2023. This is, of course, a decision for the regulator and it will be for the IBA to follow any directions given to it. However, is the Minister able to provide any updates on the FCA’s deliberations? When is a final decision likely and how much notice will be provided? The FCA’s current advice for firms with contracts referencing the three-month measure is merely to prepare for its cessation “in due course”. Given the complexity of the challenges faced with these legacy contracts, I am not sure that is particularly useful.

The transition away from Libor appears to have been largely successful. I echo the comments of the noble Baroness, Lady Kramer; we were both somewhat pessimistic at the time of the original legislation, but it seems to have been largely successful. However, the work is not quite over. I hope the Minister can instil confidence that unresolved issues are indeed being addressed, as a risk to financial stability remains.