ready for libor transition. one of our key messages to firms has been to stop writing new libor - related business that fixes or matures past 2021. the main area in which the bank undertakes such activity is in the swap programme used to hedge the government ’ s foreign exchange reserves, which we manage as agent for hm treasury. last year, we set up a separate project team to advise the treasury on its options – scaling the issue, assessing the available trading methods and liquidity in alternative markets, and evaluating the implications for risk and return. in light of that advice, the treasury decided some months ago to instruct the bank to cease writing new libor business with fixings falling after 2021, and transact only in sonia - linked contracts. our experience of sonia market liquidity so far has been positive : at least as good, if not rather better, than expected. another way in which libor potentially touches the bank ’ s operations lies in the collateral that we accept in our sterling liquidity facilities. roughly a tenth of banks ’ current drawing capacity 10 is collateralised by assets referencing sterling libor. those assets include : securities paying a libor - linked coupon, securitisations with embedded libor - linked swaps ; and libor - linked loans, in either raw or securitised form. the bank must be able to value and risk manage any collateral taken in its operations in case it has to take that collateral on to its own balance sheet in a default. as 2021 approaches, that will be increasingly difficult to do for some classes of collateral referencing libor. in many cases, firms may choose to re - reference libor - linked collateral to sonia, either by amending its terms or by issuing new instruments. we can already accept sonia - linked collateral, subject to meeting appropriate eligibility requirements. an alternative would be to ensure libor - linked collateral includes adequate fallback language specifying an alternative rate in the event that libor ceases to exist. the main https : / / www. bankofengland. co. uk / - / media / boe / files / sterling - monetary - framework / annual - report - 201819. pdf? la = en & hash = e4b7fdb6e9048dbd71f5c8ce4e00d3be9f6a96a2 all speeches are available online at www. bankofengland. co. uk /

as liquidity and supply / demand conditions. source : bloomberg data and bank calculations - second, libor ’ s widespread use persisted long after the underlying market on which it was based – the short - term wholesale unsecured funding market – largely ceased to exist. the use of judgment to set term libor rates – once simply a convenient tool to fill in for temporary gaps in an otherwise well - specified curve – became the norm. and it was that ‘ design feature ’, coupled with weak governance, and the huge stock of assets priced off libor, which gave such a strong incentive for manipulation. though governance arrangements for libor have since been strengthened, the vast majority of term libor rates remain largely or wholly based on judgment, reflecting the absence of any material underlying market ( figure 2 ). - third, despite these two profound drawbacks, the informational and liquidity advantages of using a common established benchmark, coupled with the deep embedding of libor in a range of systems, accounting and regulatory requirements have meant moving away from the use of libor has required determination, forward - thinking and co - ordinated effort – even for those large parts of the market where it is manifestly the wrong rate to use. all speeches are available online at www. bankofengland. co. uk / news / speeches figure 2 : input sources for current libor tenors 4 what opportunities will a post - libor world offer? taken together, these three observations show why libor transition is both necessary from a risk perspective and beneficial for the long - term efficiency of the financial markets, whilst also being unpopular in terms of the one - off transition costs involved. indeed, there is a material risk that those transition costs are obscuring a clear perspective of the commercial benefits to users of moving beyond libor. what are those benefits? it would be brave for me as a public official to attempt anything approaching a complete answer to that question. but let me sketch three broad areas that seem important to us. first, successful transition away from libor in its current form will unbundle the risk - free and bank sector credit risk elements of the interest rate curve. including compensation for banking credit risk may have made eminent sense for those syndicated loans made in the 60s and 70s, without greatly affecting variation in the level of libor ( as shown in figure 1 ). but many libor - linked instruments no longer directly involve banks, yet remain exposed to variations in the