On 26 February 2020, the Bank of England (BoE) published a speech given by Andrew Hauser (Executive Director, Markets) entitled Turbo-charging sterling LIBOR transition: why 2020 is the year for action – and what the Bank of England is doing to help.
In his speech Mr Hauser announces two new initiatives designed to support risk free rate transition:
- the BoE intends to publish a daily SONIA Compounded Index. This would support the use of SONIA in as wide a range of financial products as possible by simplifying the calculation of compounded interest rates. The BoE is also considering publishing a simple set of compounded SONIA Period Averages, subject to a clear consensus from the market on the preferred conventions to be used. The BoE is inviting comment on the options presented in a discussion paper, after which it will decide whether it would be helpful to publish such averages;
- from October 2020 the BoE will begin increasing haircuts on LIBOR-linked collateral it lends against. From 2020 Q3, the BoE will progressively increase the haircuts on LIBOR-linked pre-positioned collateral. Haircuts are scheduled to reach 100% (i.e. implying effective ineligibility) at the end of 2021.
Mr Hauser explains that the above initiatives are aimed at turbo-charging sterling transition, helping the market deliver against its commitment to transition away from LIBOR and further de-risking sterling markets.
Mr Hauser also reminds his audience that in line with the Risk Free Rate Working Group’s 2020 Q3 target for no new term LIBOR loan issuance, any LIBOR linked collateral issued after October 2020 will be ineligible for use at the BoE.