U.K. ‘Blazing Trail’ in Libor Shift for Global Derivatives

A clear leader is emerging in the migration away from Libor for the vast global derivatives industry.

Trading activity pegged to the U.K.’s Libor replacement stood at 46% in February with the remainder linked to the discredited benchmark, according to the latest data from the International Swaps and Derivatives Association. That compares with just 3.5% pegged to new reference rates for the Japanese yen, and about 5% for those on the U.S. dollar -- markets that are worth more than $200 trillion collectively.

The Sterling Overnight Index Average, or Sonia, benefits from its more established status, the comparatively small size of the U.K.’s financial market, and the fact that domestic regulators that have led the global transition.

“Sonia is blazing the trail for everyone else,” said Jason Granet, chief Libor transition officer at Goldman Sachs Group Inc. “The Sonia market helped establish a lot of infrastructure and calculation methodologies, and it also can show that the community of people using it take comfort in it.”

U.K. Leading

Unlike the Secured Overnight Financing Rate, the U.S. Libor replacement that was introduced in 2018, Sonia has been around since 1997 and has been overseen by the Bank of England since 2016.

Activity linked to SOFR stood around 5% for the fourth month running in February. For Japan’s Libor replacement Tonar, the Tokyo Overnight Average Rate, activity was steady on the month. Analytics company Clarus, which compiles the data with ISDA, has previously warned that the yen Libor market could risk a disorderly transition at year-end due to slow progress.

U.K. ‘Blazing Trail’ in Libor Shift for Global Derivatives

With less than 10 months until banks have been told stop issuing new Libor-linked contracts, Barclays strategists say Sonia has overtaken the benchmark in the swaps market altogether. About 70% of new swap transactions with one-year or higher tenors may now be Sonia-linked, strategists including Hitendra Rohra said in a client note.

“Other centers will be watching this very carefully,” said Padhraic Garvey, head of global debt and rates strategy at ING Groep NV. Take-up for SOFR is partly contingent on the U.K. paving the way with volumes across all Sonia maturities, he said.

“For the switch to risk-free rates to be a success, it needs to build impressively in the U.S., too,” Garvey added.

Banks and regulators will now be poised for March data that will incorporate the announcement of Libor’s end dates, tipped to finally accelerate the transition.

Other recent milestones in the Libor transition include the so-called big bang shift by derivatives exchanges to SOFR for calculating the value swaps, and ISDA’s publication of a highly anticipated legal protocol to help convert Libor-linked contracts to SOFR. Yet these have produced relatively fleeting boosts so far, leaving Britain as the exception for now.

Clarus now expects progress elsewhere, Chris Barnes, a senior vice president at the firm, wrote in a blog post. “Swiss franc, Japanese yen and U.S. dollar we are talking about you!” Barnes added.

©2021 Bloomberg L.P.

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