On 16 January 2020, the Bank of England (BoE), Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) published the following documents outlining priorities and milestones for 2020 on LIBOR transition:
- RFRWG’2 2020 priorities and milestones. The top five RFRWG priorities are: (i) cease issuance of GBP LIBOR-based cash products maturing beyond 2021 by end Q3 2020; (ii) take steps throughout 2020 to promote and enable widespread use of SONIA compounded in arrears; (iii) take steps to enable a further shift of volumes from GBP LIBOR to SONIA in derivative markets; (iv) establish a clear framework to manage transition of legacy LIBOR products, to significantly reduce the stock of GBP LIBOR referencing contracts by Q1 2021; and (v) provide market input on issues around tough legacy.
- RFRWG paper, The use cases of benchmark rates: compounded in arrears, term rate and further alternatives. The paper is addressed to financial firms and non-financial end users, such as corporates, small to medium size enterprises, retail consumers and others, who will be impacted by the intended cessation of GBP LIBOR. It considers the use of SONIA by market participants. In particular, it: (i) outlines why the use of Term SONIA Reference Rates (TSRR) must be limited; and (ii) considers use cases within cash markets where a TSRR would be beneficial and where overnight SONIA compounding in arrears is likely appropriate, taking into consideration the operational capability and the sophistication of the borrower and the structure and characteristics of a product and its use.
- RFRWG statement, Progress on the transition of LIBOR – referencing legacy bonds to SONIA by way of consent solicitation. Among other things, the RFRWG welcomes the consent solicitations that have already taken place or are underway to transition legacy bond contracts from LIBOR to SONIA, and encourages all market participants to engage with the task of transitioning as many legacy bond contracts as possible (including by way of consent solicitation). Although consent solicitation may not be feasible or appropriate for all legacy bonds, undertaking consent solicitations will help to reduce market participants’ exposure to LIBOR risks, and will reduce market disruption when LIBOR is permanently discontinued or is declared no longer representative.
- RFRWG factsheet, Calling time on LIBOR: why you need to act now. The factsheet provides a high level summary of what is happening as regards LIBOR transition and what firms need to do. In terms of what firms need to do the factsheet covers the following headlines: (i) establish where your LIBOR exposures are; (ii) check your contract terms; (iii) familiarise yourself with SONIA, and what it means for you / your business; and (iv) speak to your bank, product provider, consult with a financial services professional or advisor.
- Statement from the BoE and FCA encouraging the switch from LIBOR to SONIA for sterling interest rate swaps from Spring 2020. In this statement the BoE and the FCA encourage market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA in Q1 2020. This change is intended to move the greater part of new sterling swaps trading in SONIA and reduce the risks from creating new LIBOR exposures. Following FCA discussions with market makers, the authorities have identified 2 March 2020 as an appropriate date for this change to happen.
- Joint BoE and FCA letter to senior managers of UK banks and insurers with regards to LIBOR transition. In this letter the Prudential Regulation Authority (PRA) and FCA set out their initial expectations for transition progress during 2020 mentioning that the “intention is that sterling LIBOR will cease to exist after the end of 2021. No firm should plan otherwise”. Among other things the authorities state that the following areas should feature in firms’ planning from Q1 2020: (i) product development; (ii) reviewing infrastructure, including updating loan system capabilities; (iii) client communications and awareness; and (iv) updating documentation. The FCA and PRA will also step up engagement with firms on LIBOR transition through their regular supervisory relationship, reviewing firms’ management information and collecting data to assess progress.
Andrew Hauser, Executive Director for Markets at the BoE noted: ‘Today’s suite of publications helps provide greater clarity to the market on a number of issues central to LIBOR transition as we head towards the 2021 deadline. I am particularly encouraged by the ambitious goals that market participants have set for themselves this year – including the aim to cease issuance of cash products linked to sterling LIBOR by 2020 Q3 – and by the steps already taken towards those goals, including the creation of new SONIA-linked loans and the conversion of legacy bonds. The groundwork has been laid for a decisive shift away from LIBOR in 2020.’
Further blogs on the above papers will be published shortly.