作者
Charlotte Hill

Charlotte Hill

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Daniel Hirschfield

Daniel Hirschfield

高级专业支持律师

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作者
Charlotte Hill

Charlotte Hill

合伙人

Read More
Daniel Hirschfield

Daniel Hirschfield

高级专业支持律师

Read More

10 二月 2020

Transition from LIBOR to risk free rates – 4 / 4 观点

LIBOR transition: the regulators' 20/20 vision

  • IN-DEPTH ANALYSIS

The UK financial regulators are viewing 2020 as a critical year for LIBOR transition. The Bank of England's (BoE) Financial Policy Committee (FPC) observed in its December 2019 Financial Stability Report that good progress had been made towards LIBOR transition, but that firms needed to accelerate their efforts in order to ensure that they are prepared for the cessation of LIBOR by the end of 2021.

Only a month later, in documents published on the 16 January 2020, the BoE, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) set out the next steps for LIBOR transition in 2020. Alongside these documents, the BoE, the FCA and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) have published a series of documents outlining the priorities and milestones for the coming year, in order to ensure that firms are preparing properly for the cessation of LIBOR from the end of 2021. The documentation published on the 16 January 2020 is as follows.

RFRWG 2020 Top Level Priorities and UK RFR Working Group Roadmap 2020

This short, 2-page document comprises a statement by the RFRWG of its five main priorities, which are as follows:

  • ceasing the issuance of GBP LIBOR-based cash products maturing beyond 2021 by the end of the third quarter of 2020
  • taking steps throughout 2020 to promote and enable the widespread use of SONIA, compounded in arrears
  • taking steps to enable a further shift of volumes from GBP LIBOR to SONIA in derivative markets
  • establishing a clear framework for the transition of legacy LIBOR products, in order to significantly reduce the number of LIBOR-referencing contracts by the first quarter of 2021
  • considering the best way in which to address the issues surrounding "tough legacy" contracts and providing market input on those issues.

Alongside this concise statement of RFRWG's Priorities, is a UK RFR Working Group Roadmap for 2020. This highlights important milestones and events in the period from the first quarter of 2020 through to the first quarter of 2021 and is divided into three categories: Market Developments, RFR Working Group Deliverables; and Working Group Communications.

Letter from FCA and PRA: Next steps on LIBOR transition

On 16 January 2020, the FCA and the PRA sent a joint letter to major banks and insurers which are supervised in the UK. The letter sets out the initial expectations of the FCA and the PRA on the progress towards transition during 2020 and refers to the RFRWG's targets and the FPC's close monitoring. The letter observes that the FPC has considered further potential supervisory tools that the authorities could use to encourage firms to reduce their stock of legacy LIBOR contracts to an absolute minimum before the end of 2021. The FPC will keep the potential use of supervisory tools under review, in light of the progress towards transition made by firms during the period. However, the message is very clear: "the intention is that Sterling LIBOR will cease to exist after the end of 2021. No firm should plan otherwise".

Statement on FCA website

In a statement on the FCA's website dated 16 January 2020, the FCA and the BoE encourage the switch from LIBOR to SONIA for Sterling interest rate swaps from Spring 2020. The change is intended to move the greater part of new Sterling swaps trading to SONIA and reduce the risks from creating new LIBOR exposures. The 2 March 2020 has been identified as an appropriate date for this change to happen, and is expected to expedite transition in the derivatives market. The Statement comments that the market for SONIA derivatives is already well-established, with average cleared over-the-counter SONIA swaps exceeding £4.5 trillion per month over the past six months with the traded monthly notional value being broadly equivalent to sterling LIBOR.

Documents from the RFRWG

The RFRWG has published a collection of documents, which include the following.

"Use cases of benchmark rates: compounded in arrears, term rate and further alternatives" dated January 2020

This working paper explains that the RFRWG set up a Term Rate Use Case Task Force (the Task Force), in order to provide guidance on the need for, and the potential usage of, Term SONIA Reference Rates (TSRR), if available, alongside SONIA compounded in arrears, across different client segments. The Task Force consisted of banks, non-banks and trade associations in order to analyse the broad range of products in the cash market that currently use LIBOR.

The Task Force concluded that the use of SONIA compounded in arrears was appropriate and is likely to be operationally achievable for approximately 90% by value of the Sterling LIBOR loan market sampled and that the remaining 10% by total loan value would be likely to require alternative rates. Current users of SONIA compounded in arrears include larger and more sophisticated corporates and specialist lending sectors. Smaller corporate and retail clients of whom simplicity and/or payment certainty is a key factor may wish to consider alternative rates such as a fixed rate, the BoE's bank rate, or a SONIA term rate, if available.

The authorities in the UK have made clear their preference for the market to adopt a broad-based transition to SONIA compounded in arrears for new transactions, with use of a TSRR being more limited than the current use of LIBOR. The Working Paper provides further clarity on the potential use of a TSRR going forwards and also explains why compounding in arrears is likely to be a preferred option for most types of new business.

"Progress on the transition of LIBOR-referencing legacy bonds to SONIA by way of consent solicitation" dated January 2020

This Statement welcomes the adoption of SONIA in new public issues of sterling floating rate notes, covered bonds and securitisations. However, the RFRWG recognises that there are certain outstanding bond contracts which reference Sterling LIBOR and are due to mature beyond the end of 2021. These are referred to as 'legacy bonds' and will need to be transitioned to a SONIA-based reference. The RFRWG believes that the way to achieve the most orderly transition from LIBOR to SONIA would be to replace or amend legacy bond contracts referencing LIBOR before the fallback provisions are triggered. In many cases, this can be achieved by way of consent solicitation, which is a market-based process generally set out in bond documentation, which enables an issuer to amend bond conditions by way of bond holder consent.

Factsheet: calling time on LIBOR: why you need to act now

The RFRWG has also published a one-page factsheet. This explains why immediate action is necessary (that is, because LIBOR is expected to cease after the end of 2021). The factsheet explains in question-and-answer format what is happening, what market participants need to do and where they can find more information.

Conclusion

The RFRWG states, "with the tools published and the support of the official sector domestically and internationally, market participants have what they need to leave LIBOR behind". It is therefore extremely clear that the expectation is that market participants need to act now and without delay. Similarly, it is extremely clear from this documentation that market participants on new transactions should be limiting their LIBOR exposure and putting remediation plans in place.

Help is at hand

We are able to assist you with planning your LIBOR remediation by providing you with training on the requirements; developing a strategy to meet the new expectations; identifying exposures; and if necessary, designing and implementing a remediation project.

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