LIBOR transition – upcoming changes

LIBOR, the London Interbank Offered Rate, is due to be replaced before the end of 2021, though the changes required in financial markets are likely to gain momentum throughout 2020.

To create awareness of the upcoming changes to LIBOR, and to provide some reassurance of our intention to make the transition to the replacement rate as smooth as possible, we have published information on pru.co.uk

Your clients don’t need to do anything but we would ask you to make yourself familiar with the information provided here, to help you answer any questions they may have.

What is LIBOR and why is it being replaced?

LIBOR and other Interbank Offered Rates (IBORs) are families of interest rates, and are representative of rates at which banks are prepared to lend money among themselves, as they need it. LIBOR rates are set for different currencies and lending periods.

The way banks fund themselves has changed. Banks have gradually been making less use of the market that sets different LIBORs – which has reduced the reliability of some LIBORs. LIBOR has also struggled to overcome concerns for its reputation, which arose after evidence of past manipulation of the rate came to light. So that markets can continue to have reliable standardised rates to use as reference points across a wide range of different activities and products, changes need to take place.

LIBOR, along with most similar IBORs used in other markets, is being replaced, as financial regulators aim for a more transparent and robust process for calculating market interest rates. In most cases the replacement rates will be other, commonly used interest rates which are just calculated differently. Those not being replaced are being reformed.

Large teams of people from across the financial sector – including the Bank of England and other industry regulators – are working together to bring about these changes. The UK authorities have decided to replace Sterling LIBOR with the Sterling Overnight index Average rate, known as SONIA – an interest rate already in widespread use in many areas of the financial markets. SONIA differs slightly from LIBOR but is widely regarded, in day-to-day use, as a reliable market standard for interest rates.

Authorities in other markets, such as the US, are also planning to replace LIBOR or its equivalent, for their currencies.

How LIBOR changes might affect your clients’ investments

Where a fund has an objective related to LIBOR, it will need to change. We will make this change in line with best market practice and with the aim of having a minimal effect on how the fund is managed. We will communicate with clients any planned changes to the objective of the fund they’re invested in, before they take effect. Additionally, there may be assets related to LIBOR held within a fund which will also be transitioned to SONIA-based assets, at an appropriate time.

Both Prudential and M&G are members of the industry group working to make the market-wide transition to SONIA as smooth as possible, and determining best practice in areas of the market. This working group is supported by both the FCA and the Bank of England.

Any effect on the value of your clients’ investments, at the time the change occurs, is currently expected to be minimal. However, it is not possible to guarantee that circumstances may not arise which result in a more material change to investment values.

For more information on LIBOR and the upcoming changes, please visit:

https://www.fca.org.uk/markets/libor

or

https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/what-you-need-to-know-about-libor-transition

© Prudential 2020