15 May 2020

Further to their statement on 25 March 2020, the Working Group on Sterling Risk-Free Rates has updated its statement on the impact of COVID-19 on the timeline for firms’ LIBOR transition plans.

The update states that due to coronavirus, the PRA and FCA suspended transition data reporting at the end of Q1 for dual regulated firms, and cancelled some Q1 firm meetings. In light of the developments since, including the FSR statement on LIBOR published on 7 May 2020, the PRA and FCA have decided to resume full supervisory engagement with these firms on their LIBOR transition progress from 1 June 2020, including data reporting at the end of Q2.

The FSR statement reported that LIBOR rates, and therefore costs for borrowers, have risen during the COVID-19 pandemic as central bank rates have fallen. This may have partially offset some of the government support provided to businesses in response to COVID-19. Throughout the same period, SONIA (the proposed replacement for LIBOR) has closely tracked bank rate.

In addition, the limited market transactions underpinning LIBOR fell away almost entirely during March, leaving them reliant on "expert judgement". By contrast, the number of transactions underpinning SONIA, the proposed replacement rate for LIBOR, has increased during this period.

The COVID-19 pandemic has served to once again highlight the underlying weaknesses in LIBOR and the need to transition to an alternative benchmark at the earliest opportunity. The FSR statement concludes that: "while there may be a need for short-term reprioritisation, market participants should remain focused on the continued importance of removing reliance on LIBOR by the end of 2021."