The Bank of England (the Bank), Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have published a set of documents today, outlining priorities and milestones for 2020 on LIBOR transition.
This is a critical year for LIBOR transition. As the Bank’s Financial Policy Committee (FPC) set out in December 2019, whilst good progress has been made, firms need to accelerate efforts to ensure they are prepared for LIBOR cessation by end-2021.
To help achieve this, the RFRWG has today published its priorities and an updated roadmap for the year ahead to highlight important events and clarify actions market participants should take to reduce LIBOR exposure and transition to alternative rates, including:
- Ceasing issuance of cash products linked to sterling LIBOR by end-Q3 2020;
- Throughout 2020, taking steps that demonstrate that compounded SONIA is easily accessible and usable;
- Take steps to enable a further shift of volumes from LIBOR to SONIA in derivative markets;
- Establishing a framework for the transition of legacy LIBOR products, in order to significantly reduce the stock of LIBOR referencing contracts by Q1 2021; and
- Considering how best to address issues “tough legacy” contracts.
The Bank and FCA support these objectives and have published two documents designed to further catalyse transition efforts:
- First, a joint letter that has been sent to major banks and insurers, supervised in the UK. This letter sets out the initial expectations of the FCA and PRA of firms’ transition progress during 2020, including in relation to the targets set by the RFRWG, and highlights the FPC’s close monitoring of the steps being taken.
- Second, a statement from the Bank and the FCA 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.
The RFRWG has also published a series of documents today, including:
- A document setting out the RFRWG’s views on which types of business and client should use overnight SONIA, relative to alternatives including forward-looking term rates. This concludes that use of SONIA compounded in arrears is appropriate and operationally achievable for 90% of new loans by value, which is consistent with the RFRWG’s existing expectation that the use of
forward-looking term rates will be more limited than the current use of LIBOR. The Bank and FCA supports this conclusion fully.
- A set of helpful ‘lessons learned’ from recent conversions of legacy LIBOR contracts.
- A factsheet that makes clear the “whys” and “whats” of LIBOR transition that sets out why all market participants need to act now.
Today’s publications, along with an update in December, are a comprehensive suite of materials that support of the RFRWG’s priorities and milestones. The time to act is now: with the tools published today and the support of the official sector domestically and internationally, market participants have what they need to leave LIBOR behind.