Libor is used as the basis for a growing number of derivative contracts even though the interest rate benchmark is set to be phased out at the end of 2021, according to the Bank of England.
Libor, the London interbank offered rate, has long been used as a benchmark interest rate to underpin trillions of dollars of contracts for derivatives, bonds and loans. But regulators have said the benchmark is set to be discontinued after 2021, following the scandal in which many banks colluded to "fix" the rate to suit their needs.
The BoE said Sept. 30 that much more work is needed to complete the transition away from Libor.
"In particular, in loan markets, Libor-linked lending continues to dominate. And many new long-dated derivative contracts also continue to reference Libor, with steady growth in the stock of cleared sterling Libor swap contracts maturing beyond 2021," said the BoE.
It said the total value of swap contracts referencing sterling Libor cleared through LCH Group Holdings Ltd. stood at more than £25 trillion in August 2019 compared with slightly more than £20 trillion in April 2018.
The BoE and Federal Reserve Board have urged banks to switch to alternative rates, such as Sonia, the sterling overnight index average rate; or Sofr, its U.S. sister.
Sonia is underpinned by an average of over £40 billion transactions a day, said the Bank. Libor, in contrast, is based on a limited panel of banks that submit their best estimates for borrowing costs over certain periods in the future on a daily basis.
However, markets appreciate the longer term estimates of interest rates, which Libor provides compared with the overnight borrowing rates provided by the alternatives.
The BoE said firms must be able to run their businesses without Libor from the end of 2021.
"Firms now need to focus on shifting new business from Libor to alternative rates, and should put in place a clear transition plan to mitigate their legacy risk from older contracts," said the BoE.
