On 10 March 2020, the Loans Enablers Task Force (the Task Force) of the Working Group on Sterling Risk-Free Reference Rates (the RFR Working Group) published an indicative roadmap outlining a path for the discontinuation of new GBP LIBOR-based cash lending by end-Q3 2020. This roadmap is intended to act as a guide for lenders, borrowers and infrastructure providers. The roadmap is focused on the development of products referencing compounded SONIA as the primary risk-free rate in sterling markets. Compounded SONIA has been identified as operationally achievable for 90% of new loans by value (see our earlier blog Working Group on Sterling Risk-Free Reference Rates: The use cases of benchmark rates: compounded in arrears, term rate and further alternatives).
To help meet the Q3 target, the Task Force was established to identify and overcome perceived barriers to the loans market using alternative reference rates in new cash products. The Task Force is made up of a broad cross section of market participants, working with representatives from the Bank of England and the Financial Conduct Authority. The Task Force intends to supplement the roadmap with additional materials such as a basic guide to compounding and a working paper on conventions.
The roadmap sets out 10 areas of activity with a suggested time frame for action. These are broadly as follows:
- Understand latest market conventions and methodologies to inform target product set in line with market standards.
- Carry out impact assessment across tech and model systems and processes; plan for vendor systems updates that may be required ahead of RFR functionality build.
- Determine target product set with which to meet client needs post transition.
- Determine customer eligibility/suitability at product level and according to internal sales frameworks; obtain clarification on tax & accounting treatment for all new products.
- Plan for system changes including vendor system updates to support SONIA products; consider a holistic approach to the product development process and subsequent engagement with stakeholders to ensure alignment across operations, treasury and rate risk management teams.
- Identify internal governance requirements and impact on timelines for readiness and incorporate into plans.
- Consider what will be required to trade RFRs at scale and incorporate any necessary changes into plans.
- Assess risk appetite for Go/No Go Decision on full product launch against liquidity in SONIA lending market; consider readiness of peers and clients in relation to transition plans.
- Set risk appetite to drive decision making with consideration given to conduct risk, financial risk, economic risk and legal.
- Feed back learnings from pilot to establish product conventions or improvements which suit customer needs. Tailor products accordingly and initiate full launch in readiness for end of Q3 target date.
Throughout the period, lenders, borrowers and vendors should work on integrating systems to incorporate finalised conventions and prepare internal systems; establish ongoing customer and staff education initiatives and engage with market consultations and promotion of SONIA as the preferred rate for loan transactions.