The Bank of England (BOE) has a message for financial businessesexiting the scandal-plagued London interbank offered rate (LIBOR)benchmark: Get moving.

It issued a statement on Thursday giving banks until Septemberto cease issuing cash products linked to sterling-denominatedLIBOR, a benchmark which underpins $30 trillion of financialcontracts in sterling markets alone. The direction is part of awider effort to speed up transition in the derivatives marketbefore the benchmark expires at the end of 2021.

"There is a lot to be done," said Simon Woods, a partner atErnst & Young LLP. "Firms not being ready gives rise tocommercial and regulatory risks, and we expect some banks may needto reprioritize their change programs to hit many of the upcomingdeadlines."

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In 2017, the BOE started the countdown on retiring LIBOR, usedfor $300 trillion of contracts globally including bonds and loans.For decades the rate served as a benchmark set daily by banks todetermine interest rates on everything from student loans andmortgages to derivatives and credit cards. But ever since Europeanand U.S. banks were found to have manipulated rates to benefittheir own portfolios, the benchmark has been seen as tainted.

Markets focused on loans, securitization, and treasury productsare generally less prepared than those dealing with bonds andderivatives, according to Claude Brown, a partner at Reed Smith LLPin London.

"U.S. banks also seem to be ahead of the curve, possibly becausethey have had more bandwidth because they have been lesspreoccupied by Brexit," he said.

Market-makers will be encouraged by the BOE to shiftpound-denominated interest-rate swaps on March 2 from LIBOR to itsreplacement, the Sterling Overnight Index Average (SONIA).Businesses should establish a framework for the transition, the BOEsaid. There's a $12 trillion backlog of legacy loans that needconversion.

"It is unlikely LIBOR-linked swaps stop trading completely untilall other products have transitioned to SONIA-underlying," saidAntoine Bouvet, a senior rates strategist at ING Groep NV inLondon. "There is an amount of inertia." That comes with the U.K.market in what he called "an enviable place" compared with otherjurisdictions.

What Bloomberg Intelligence Says

"The clock is ticking louder for the switch to SONIA from LIBOR.Expect transition flows to continue but trading in LIBOR-linkedproducts needs to fall significantly to signal the market is readyfor the end of LIBOR. It probably means lower volatility in timesof stress given the removal of the credit component."

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– Tanvir Sandhu, Chief Global Derivatives Strategist

The BOE views SONIA as a better measure of general interest-ratelevels than LIBOR because it does not include a term bankcredit-risk component. The market for SONIA derivatives is alreadywell established, the BOE said in a joint statement with theFinancial Conduct Authority.

The average for cleared over-the-counter SONIA swaps exceeded4.5 trillion pound ($5.9 trillion) per month over the past sixmonths, and the traded monthly notional value is now broadlyequivalent to Sterling LIBOR.

"The time to act is now," the BOE said in a statement. "This isa critical year for LIBOR transition."

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