The Working Group on Sterling Risk-Free Reference Rates (Working Group) has published a consultation paper for the sterling cash market (including loans, bonds, and securitisations) considering four methodologies that could be used to calculate the credit adjustment spread for fallbacks from GBP LIBOR to SONIA in cash products maturing beyond the end of 2021. The consultation was open from 16 January 2020 to 6 February 2020 and attracted 39 responses from a range of market participants.

The consultation identified a strong consensus in favour of the historical 5 year median approach as the most appropriate methodology for credit adjustment spreads in both cessation and pre-cessation fallbacks for sterling LIBOR linked cash products maturing beyond end 2021.  This is in line with the approach adopted by the International Swaps and Derivatives Association (ISDA) on the spread methodology for sterling LIBOR interest rate swaps. The primary reasons identified by respondents for favouring this approach were simplicity and transparency, and this was considered to be a robust rate that could not be easily manipulated.

The majority of respondents indicated that it would be problematic to have different credit adjustment spreads based on when fallbacks take effect (i.e. pre- or post-cessation) and they highlighted the benefits of an internationally consistent spread methodology to be applied in fallbacks across different currencies.

The Working Group will discuss the results at its forthcoming meetings, including consideration of potential next steps on how these results can help catalyse further transition in sterling cash markets.