On 28 September 2020, the Bank of England (BoE) announced that both it and the FCA support and encourage liquidity providers in the sterling swaps market to adopt new quoting conventions for inter-dealer trading based on SONIA instead of LIBOR from 27 October 2020. The intention is to facilitate the further shift in market liquidity toward SONIA swaps, bringing benefits for a wide range of end users and other market participants as they move away from use of LIBOR.
The BoE explains that the proposed change will involve interdealer brokers (IDBs) moving the primary basis of their pricing screens and curve construction for interest rate swaps from GBP LIBOR to SONIA. Currently, SONIA swaps are priced by default by reference to a LIBOR swap adjusted by the LIBOR-SONIA basis. The change would mean that SONIA swaps would be the primary pricing point. LIBOR swaps would be priced by reference to SONIA swaps adjusted by the LIBOR-SONIA basis. The same change would be made in the primary trading of swaps against bond futures in sterling markets, such that the default pricing will show SONIA swaps relative to gilt futures. Where participants currently trade LIBOR forward rate agreements (FRAs), the default trade structure would change to LIBOR Single Period Swaps (SPS). These two trading structures fulfil similar economic functions, but use of SPS provides much greater compatibility with the fallback approach expected to be introduced through ISDA documentation for derivative markets.
The BoE further explains that the changes will not prohibit trading in GBP LIBOR swaps, but they will mean that the primary source of pricing and liquidity will switch from GBP LIBOR swaps to SONIA swaps. This, in turn, should encourage a greater proportion of swap trading volumes to switch to SONIA.