The Bank's risk management approach to collateral referencing LIBOR for use in the Sterling Monetary Framework - Market Notice

This market notice forms part of the documentation for the Bank of England’s operations under the Sterling Monetary Framework.
Published on 26 February 2020
This market notice (Market Notice) forms part of the Documentation for the Bank of England’s operations under the Sterling Monetary Framework (SMF) and should be read in conjunction with the main SMF Documentation, each as amended from time to time.  This Documentation is available on the Bank’s website. Any capitalised term used in this Market Notice and not otherwise separately defined herein, shall bear the same meaning as set out in the glossary to the SMF Terms and Conditions. The Market Notice may be supplemented and amended from time to time.

Scope and definitions

Throughout this Market Notice, LIBOR refers to GBP LIBOR, USD LIBOR, EUR LIBOR, JPY LIBOR and CHF LIBOR.

Throughout this Market Notice, LIBOR Linked Loans refers to loans maturing after 31 December 2021, where the borrower currently pays a rate of interest calculated by reference to LIBOR or will revert to paying a rate of interest calculated by reference to LIBOR. A LIBOR Linked Loan Portfolio refers to Loan Portfolios where one or more loans in the portfolio is a LIBOR Linked Loan.

Throughout this Market Notice, LIBOR Linked Collateral refers to:

  • LIBOR Linked Loan Portfolios;
  • Collateral Securities where the coupon pays a rate of interest calculated by reference to LIBOR;
  • Collateral Securities where embedded swap payments are calculated by reference to LIBOR; and
  • Collateral Securities backed by loans where one or more loans in the portfolio is a LIBOR Linked Loan,

in each case, maturing after 31 December 2021.

For Collateral Securities, the maturity date will be assumed to be the legal final maturity date specified in the relevant governing documents. 

Haircut add-ons

Pursuant to this Market Notice, a haircut add-on will be applied to all LIBOR Linked Collateral. The haircut add-on will be 10 percentage points from 1 October 2020, 40 percentage points from 1 June 2021 and 100 percentage points from 31 December 2021. For the avoidance of doubt, haircuts will be capped at 100 per cent.

In respect of Loan Portfolios containing both LIBOR Linked Loans and other loans, SMF participants may choose to either remove the LIBOR Linked Loans from the Loan Portfolios, or alternatively split these Loan Portfolios subject to them meeting the Bank’s standard collateral eligibility requirements.

Eligibility

This Market Notice makes the following changes to the eligibility of LIBOR Linked Collateral: 

  • From 1 October 2020, all securities issued on or after that date and maturing after 31 December 2021, where the coupon pays a rate of interest calculated by reference to LIBOR, will be ineligible for use in the SMF; 
  • From 1 October 2020, all securities issued on or after that date and maturing after 31 December 2021, where embedded swap payments are calculated by reference to LIBOR, will be ineligible for use in the SMF; 
  • From 1 October 2020, all securities issued on or after that date and maturing after 31 December 2021, backed by loans where one or more loans in the portfolio is a LIBOR Linked Loan that was originated after 1 October 2020, will be ineligible for use in the SMF;
  • From 1 October 2020, all LIBOR Linked Loans issued on or after that date, will be ineligible for use in the SMF; and
  • From 31 December 2021, all LIBOR Linked Collateral, regardless of the issuance or origination date, will be ineligible for use in the SMF. 

Except as described above, LIBOR Linked Collateral may otherwise still be requested for eligibility until 31 December 2021. 

Fallbacks

The Bank will monitor market developments in relation to fallback language and will keep under review the potential to distinguish between LIBOR Linked Collateral with robust fallback language and that without, as market practice develops.

Eligible securities impacted

Please refer to the list of eligible securities that are impacted by this policy. The Bank’s current intention is to update this on a monthly basis.

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