FCA and Bank of England encourage switch from LIBOR to SONIA for sterling interest rate swaps from Spring 2020

The FCA and the Bank of England encourage market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA (the Sterling Overnight Index Average) in Q1 2020.
Published on 16 January 2020

This change is intended to move the greater part of new sterling swaps trading to SONIA and reduce the risks from creating new LIBOR exposures.

Following FCA discussions with market makers, the authorities have identified 2 March 2020 as an appropriate date for this change to happen.

The market for SONIA derivatives is already well-established. Average cleared over-the-counter SONIA swaps exceeded £4.5trillion per month over the past six months, and the traded monthly notional value is now broadly equivalent to Sterling LIBOR.

This change is also reflected in the roadmap set out by the Working Group on Sterling Risk-Free Reference Rates (‘the Working Group’). In addition to shifting the swap market convention, the roadmap details other priorities set by the Working Group, including ceasing GBP issuance of LIBOR-based loans by third-quarter 2020 and managing down legacy LIBOR-linked swap portfolios and exposures.

SONIA derivatives are likely to be the appropriate market convention for most contracts, particularly those maturing after 2021. The number of cases where LIBOR contracts are judged to remain appropriate is limited today, and will reduce further as the end of 2021 approaches. Market participants should be aware of the risks if new LIBOR transactions are entered into, and take appropriate steps to establish that their clients are too.

Commenting on this initiative, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, said:

’We have seen great progress in the development of the SONIA derivatives market. I encourage all market participants to join the initiative to put SONIA first over LIBOR from 2 March. This should help make SONIA the market standard in sterling swaps as is already the case in the bond market.’

Andrew Hauser, Executive Director for Markets, Bank of England, said:

‘This move toward a much greater use of SONIA in the sterling derivatives market builds on the strong foundations established in recent years and demonstrates a strong continuing partnership between UK authorities and market participants to bring about a decisive shift away from use of LIBOR ahead of end-2021.’