The UK's main regulator, the Financial Conduct Authority (FCA), announced today that sterling LIBOR will be replaced by the end of 2021. The deadline was given by the FCA CEO Andrew Bailey in a speech delivered in London.
The announcement comes as a surprise. Although the Bank of England (BoE) had already announced in April of this year that LIBOR would be replaced by SONIA, an overnight index swap (OIS) rate tied to the BoE's Bank Rate, there was no timetable for the change. After consultation with "panel banks, [...] central banks and regulatory authorities", to ascertain how quickly the transition could be made, the FCA concluded that "four or five years [...] would be challenging but could probably be achieved". The regulator has asked panel banks to continue to provide LIBOR submissions until the end of 2021.
The fate of legacy contracts - mostly interest rate swaps - that reference LIBOR as the floating rate is an open question. The FCA suggested that those contracts could either be "amended [...] to reference an alternative rate" or that the regulator could "persuade or oblige" panel banks to continue to submit LIBOR rates. It seems likely that most end users would prefer to switch their floating rate exposure given SONIA's advantage over LIBOR as a transaction- versus submission-based rate. This should lead to a significant uptick in activity in the sterling LIBOR/OIS basis swap market.