65% of firms have no LIBOR transition plan in place

Following the LIBOR scandal and consequent Wheatley Review of 2012 which concluded that the widely-used benchmark rate had been manipulated, the Bank of England and FCA signalled that banks must move away from using the London Interbank Offered Rate from 2021.

In its place will be Sonia, the Sterling Overnight Index Average, the effective overnight interest rate paid by banks for unsecured transactions in the British sterling market.

Market estimates suggest around $350 trillion worth of financial contracts are underpinned by LIBOR globally, including mortgages, and all contracts will need to be rebased from LIBOR to the new reference rate.

In January 2020, the FCA said that whilst good progress has been made, "firms need to accelerate efforts" to ensure they are prepared for LIBOR cessation by the end of 2021, warning that "the time to act is now".

The new Duff & Phelps survey found that whilst 45% of respondents said they’ve begun thinking about the transition, one in five (20%) admitted they haven’t started the process.

Despite this, eight out 10 firms (79%) said that Covid-19 has had little or no impact on their LIBOR transition progress.

Marcus Morton, managing director of valuation services at Duff & Phelps, said: “LIBOR transition represents one of the most extensive regulatory changes in decades, so it’s quite worrying to see that financial institutions are largely underprepared for what’s to come. Many expected the Covid-19 pandemic to delay the transition, but regulators have stood firm and have kept the original deadline.

“Firms that have not yet begun or have only started thinking about their transition need to understand the extent of their exposure. Impacted firms will have many contracts referencing LIBOR, all of which will need discovery, review and potential repapering. Employing technologies such as natural language processing (NLP) and AI to analyse, interpret and extract relevant clauses and LIBOR-influenced language on target contracts could go a long way to help the industry reach its deadline, but they must start now.”