BoE and FCA launch LIBOR transition guidance

Michael Lloyd

January 16, 2020

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The Bank of England, FCA and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have published documents outlining how to prepare for LIBOR transition and have warned firms that the time to act is now.

The Bank of England and the FCA are encouraging market makers to switch the convention for sterling interest rate swaps from LIBOR to SONIA on 2 March 2020.

This is designed to help progress transition in the derivatives market.

Andrew Hauser, executive director for markets at the Bank of England, said: “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.”

Christopher Woolard, executive director of strategy and competition at the FCA, added: “In most products, market participants have made impressive progress in moving away from LIBOR. The time has come to draw to a close its remaining use.

“The bank and the FCA have written to major banks and insurers to set out our expectations for transition progress during 2020 and to reaffirm our support for the Working Group’s targets.

“Firms must act now to help meet these targets and ensure a smooth transition to alternative rates by the end of 2021.”

The RFRWG wants firms to take steps to enable a shift of volumes from LIBOR to SONIA in derivative markets and throughout 2020 to demonstrate that compounded SONIA is easily accessible and usable.

It said it wants firms to consider how best to address issues such as ‘tough legacy’ contracts.

Tushar Morzaria, chair at Working Group on Sterling Risk-Free Reference Rates, said: “2020 will be a pivotal year in the transition journey, with critical focus on enabling the flow of new business away from sterling LIBOR.

“The Working Group on Sterling Risk-Free Reference Rates has therefore defined a key priority to cease issuance of sterling LIBOR cash products by the end of Q3.

“In conjunction, the RFRWG fully supports the Bank of England and FCA initiative to encourage market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA in Q1 2020.”

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