MNI: BOE Ups Drive To Replace LIBOR With SONIA As Benchmark

By David Robinson

     LONDON (MNI) - Bank of England Governor Mark Carney on Wednesday announced

the next step on the road to replace the current interbank lending rate, Libor,

with the sterling overnight rate, SONIA, as the benchmark rate.

     Carney announced that from January, the working group dealing with Libor

replacement would be broadened to include buy-side institutions and financial

infrastructure operatives. The aim is to replace Libor by 2021.

     "Buy side firms, issuers, infrastructure firms and trade associations will

be brought into the (working) Group alongside banks and broker-dealers. We are

under no illusions about the complexity of the task. Libor is embedded

throughout the financial system in derivatives, loans, bonds and commercial

contracts," Carney said in a speech at Bloomberg's London office.

     The working group's new mandate is "to catalyse a broad-based transition to

SONIA over the next four years across sterling bond, loan and derivative

markets, so that SONIA is established as the primary sterling interest rate

benchmark by end 2021," a BOE statement said.

     The Libor rigging scandal highlighted concerns over the veracity of the

interbank rate, which is determined by the rates major banks say lending would

be priced. The decline in interbank lending has made Libor look increasingly

artificial. The BOE wants to ensure SONIA has greater depth and usage before it

becomes the benchmark.

     "Libor is overly reliant on expert judgement rather than actual

transactions. That situation is neither desirable nor sustainable. There is also

a risk that panel banks might withdraw from Libor and precipitate its collapse,

which raises obvious financial stability concerns," Carney said.

     "It has become increasingly clear that we cannot rely on Libor in the long

term," he added.

     His speech focussed on developments in the two years since the BOE

implemented the Fair and Effective Markets Review (FEMR) and contained no

comments on monetary policy.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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