United Kingdom (and EU regulation)

Working Group on Sterling Risk-Free Reference Rates – minutes of meeting (23 February 2021)

By John Coley (UK) and Davide Barzilai (UK) on March 26, 2021 Posted in Benchmarks – IBOR transition, United Kingdom

On 25 March 2021, the Working Group on Sterling Risk-Free Reference Rates (Working Group) published the minutes from its virtual meeting held on 23 February 2021.

Key points in the minutes include:

PRA representatives indicated that supervisory oversight would intensify over the coming weeks and months, with an active meeting programme and monitoring in place to see firms make progress in line with industry milestones.
The lending market was noted as a more challenging area than other segments. The PRA was monitoring firms’ preparation and saw that compounded in arrears SONIA was actively being used across bi-lateral, syndicated and multi-currency deals. However, data from Q4 2020 suggested less than 20% of new commercial lending was taking place on a ‘day 1’ SONIA basis. This was not a volume that gave the PRA comfort that all firms had made the necessary preparations to meet the Q1 2021 GBP lending milestone.
The PRA had been made aware of some firms in syndicates holding back progress by advising clients to remain on LIBOR. There was a strong message from the PRA that they would not allow these firms to act as a brake on transition. Long lead times for the necessary changes had already been accounted for through staggered milestones, with an end-Q3 2020 target of firms to actively offer alternatives ahead of ceasing GBP LIBOR issuance at end-Q1 2021.
In relation to legacy contracts, the PRA’s expectation was that wherever possible all legacy LIBOR contracts would be amended to include at least a contractually robust fallback, or preferably an agreed conversion to an alternative rate no later than the end of 2021.
Within syndicated lending markets, the PRA expected the lead arranger to proactively consult with other banks on a timeline consistent with Working Group milestones. Lead arrangers and syndicate members should make their supervisors aware if they were not receiving satisfactory engagement.
Firms would need to ensure they considered the increasing conduct risks associated with continued offering of LIBOR products especially where liquidity in these products was likely to deteriorate. The FCA noted that moving away from LIBOR was the most effective way to mitigate conduct concerns and would challenge firms where it believed they should be doing more to shift business away from LIBOR. The FCA and the PRA would act on intelligence where syndicates were not shifting away from GBP LIBOR and the FCA had already had conversations on this with some participants of a syndicate deal that closes in Q2 2021.
The Bank of England (BoE) highlighted that examples of multi-currency deals were already in place with a robust non-LIBOR sterling leg, demonstrating its feasibility. It was recognised that the lead bank may be booking the deal outside of the UK, but to the extent they were part of a regulated group in the UK, supervisors would take a dim view on them not following Working Group guidelines. While some differences in currency timelines were recognised, messaging from US regulators and the Alternative Reference Rates Committee had also highlighted that USD LIBOR should stop being used as soon as practicable.
A BoE representative noted the Working Group’s messaging to date could be summarised in two tiers – that robust fallbacks should be put in place to the greatest extent possible to provide a backstop, and that ideally contracts would be actively transitioned where possible.