Fund managers slow to ditch LIBOR-linked benchmarks

The London Interbank Offered Rate (LIBOR) is currently the world's most widely-used reference rate, providing a benchmark for about $350trn worth of financial products, according to legal firm Ashurst.

However, a big shake-up is looming as bank traders were found to have been manipulating LIBOR in the wake of the Global Financial Crisis, leading to around $9bn in fines, several convictions and ultimately the decision by regulators to phase out LIBOR altogether by 2021.

In July, the Bank of England warned the continued reliance of global financial markets on LIBOR is a threat to financial stability and said market participants must now "accelerate" their transition preparation.

It found financial products referenced to LIBOR with a post-2021 maturity remain prevalent, while the volume of LIBOR-linked sterling derivatives stretching beyond the phase-out date grew in 2018. 

Similarly, Moody's warned in May that the "window is fast closing" to take action to limit risks associated with the phase-out of LIBOR. 

Despite warnings, the Investment Association's February survey on LIBOR use found 90% of asset managers said they use it as a benchmark for at least one fund.

The IA warned at the time that "the benchmarks and targets will need to be transitioned while avoiding the appearance of inflating measured performance".

FE data shows 106 IA universe funds use a LIBOR-linked benchmark, while just three - all of which are Royal London Asset Management products - use the Sterling Overnight Interbank Average Rate (SONIA). 

SONIA is a near risk-free alternative derivatives reference rate that reflects banks' and building societies' overnight funding rates in the sterling unsecured market.

Different markets and regulators across the world have also begun preparations for implementing similar replacements, such as the Secured Overnight Financing Rate (SOFR) in the US.

Even as the deadline nears, in the last 18 months three funds have launched with a LIBOR-linked benchmark; AB Financial Credit Portfolio, BNY Mellon Sustainable Real Return and Franklin Absolute Return Bond. In addition, as recently as July, Pictet launched its TR-Sirius fund with a LIBOR-linked hurdle rate. 

Church House Investment Management, which in October 2018 was well on its way to selling all LIBOR-linked securities it invests in, still currently uses the rate as the benchmark for its Tenax Absolute Return Strategies fund, but the firm now intends to replace it with an alternative.

Co-manager of the fund Jeremy Wharton said: "We will be switching the benchmark from LIBOR to SONIA before LIBOR is no longer supported. 

"We have not yet decided whether to apply a spread or how much and are not rushing to do it as obviously a switch involves regulatory and cost implications. Also while SONIA is fully established it is not necessarily widely understood yet by all investors."

Similarly, Investment Week understands Alliance Bernstein intends to use SOFR. 

A BNY Mellon spokesperson said the firm is yet to select a specific replacement rate, but it is "preparing for the LIBOR transition" and is "maintaining an active dialogue with regulatory bodies, our clients and the groups developing the replacement rates". 

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• Topics
• Regulation
• Ashurst
• Libor
• Royal London Asset Management
• Church House Investment Management
• jeremy wharton
• Bank of England
• regulation