On 16 June 2021, the FCA and the Bank of England (BoE) issued a statement supporting and encouraging liquidity providers in the US dollar linear interest rate swaps market to adopt new trading conventions for interdealer trading based on the secured overnight financing rate (SOFR) instead of LIBOR from 26 July 2021. This is to facilitate a shift in market liquidity towards SOFR, bringing benefits for a wide range of users as they move away from LIBOR.

The statement also provides the following background and technical notes:

  • The proposed change will involve interdealer brokers moving the primary basis of their pricing screens and curve construction for interest rate swaps from USD LIBOR to SOFR.
  • At present, SOFR swaps are priced by default by reference to a LIBOR swap adjusted by the LIBOR-SOFR basis. As a result of this change, SOFR swaps would be the primary pricing point.
  • LIBOR swaps would therefore be priced by reference to SOFR swaps adjusted by the LIBOR-SOFR basis.
  • The same change would be made in the trading of swap spreads (swaps against bonds) in US dollar markets, such that the default pricing will show SOFR swaps relative to US Treasuries.
  • For the avoidance of doubt, from 26 July 2021, the FCA and the BoE encourage all trading in USD LIBOR swaps, and USD LIBOR-based swap spreads in the interdealer broker market to be replaced with trading in SOFR swaps and SOFR-based swap spreads.
  • USD LIBOR is expected to be accessible only as a basis swap to SOFR in the interdealer broker market from this date. However, screens for outright LIBOR swaps and LIBOR-based swap spreads are expected to remain available for informational purposes, but not trading activity, until 22 October 2021. After this date, these screens would be turned off altogether.