The Bank’s risk management approach to collateral referencing USD LIBOR for use in the Sterling Monetary Framework - Market Notice 19 May 2022

This market notice (the Market Notice) forms part of the SMF Documentation for the Bank of England’s (the Bank) operations under the Sterling Monetary Framework (the SMF) and should be read in conjunction with the other SMF Documentation, each as supplemented and amended from time to time.
Published on 19 May 2022

This Market Notice sets out the Bank's risk management approach to collateral referencing overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings for use in the SMF. It forms part of the SMF Documentation for the Bank’s operations under the SMF and should be read in conjunction with the other SMF Documentation, each as supplemented and amended from time to time. This SMF 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. This Market Notice supersedes the relevant sections of the Market Notices published on 26 February 2020, 07 May 2020 and 24 March 2021 related to overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings. This Market Notice may be supplemented and amended from time to time.

Scope and definitions

Throughout this Market Notice, USD LIBOR refers to overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings.

Throughout this Market Notice, a USD LIBOR Linked Loan refers to a loan maturing after 30 June 2023, where the borrower is currently paying, will revert to paying, or may be required to pay, interest or any other amount calculated by reference to USD LIBOR. A USD LIBOR Linked Loan Portfolio refers to a loan portfolio where one or more loans in the portfolio is a USD LIBOR Linked Loan.

Throughout this Market Notice, USD LIBOR Linked Collateral refers to: 

  • any USD LIBOR Linked Loan Portfolio; 
  • any Collateral Security where the issuer is currently paying, will revert to paying, or may be required to pay, a coupon or any other amount calculated by reference to USD LIBOR; 
  • any Collateral Security where embedded swap payments are calculated, will revert to being calculated, or may be required to be calculated, by reference to USD LIBOR; and 
  • any Collateral Security backed by loans where one or more loans in the portfolio is a USD LIBOR Linked Loan, 

in each case, maturing after 30 June 2023.

For Collateral Securities, the maturity date will be deemed to be the final scheduled 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 USD LIBOR Linked Collateral. The haircut add-on will be 10 percentage points from (and including) 1 October 2022, 40 percentage points from (and including) 1 March 2023 and 100 percentage points from (and including) 30 June 2023; provided that final haircuts will be capped at 100 per cent.

However, the Bank reserves the right to waive the USD LIBOR linked haircut add-ons applicable to USD LIBOR Linked Collateral where the Bank is satisfied (in its sole discretion) that such USD LIBOR Linked Collateral benefits from a robust fallback or a future rate switch mechanism that meets either or, where relevant, both of the following conditions:

  1. the instrument or agreement that governs such USD LIBOR Linked Collateral (including the instrument or agreement that governs the underlying USD LIBOR Linked Loan(s) or swap(s)) is governed by US federal or state law, and none of the exceptions to the application of the US Adjustable Interest Rate (LIBOR) Act apply (as separately described in the relevant due diligence questionnaire related to this Market Notice); and/or
  2. such USD LIBOR Linked Collateral (including the instrument or agreement that governs the underlying USD LIBOR Linked Loan(s) or swap(s)) satisfies each of the two conditions set forth below:

    1. the instrument or agreement that governs such USD LIBOR Linked Collateral (including the instrument or agreement that governs the underlying USD LIBOR Linked Loan(s) or swap(s)) ensures USD LIBOR will be replaced with a clearly specified alternative rate either:
      1. on a specific date no later than its first interest rate reset date occurring after 30 June 2023 (a ‘future rate switch’); or

      2. in the event that the relevant USD LIBOR setting ceases or is no longer representative of the underlying market and economic reality that it seeks to measure, as announced by the UK Financial Conduct Authority or, where applicable, by the Board of Governors of the US Federal Reserve System (a ‘fallback’); and
    2. such instrument or agreement clearly specifies the alternative rate to be adopted, including how this would be calculated and the applicable market conventions, as well as any required tenor or credit adjustment spread that may apply in relation to the calculation of the alternative rate.

For the avoidance of doubt, both condition (1) and condition (2) may be applicable in the case of some USD LIBOR Linked Collateral.

If, after the Bank has notified a participant in the SMF (an SMF Participant) of the Bank’s waiver of the USD LIBOR linked haircut add-ons, such SMF Participant becomes aware (i) that the replacement of USD LIBOR with the alternative rate has not taken, or will not take, effect or has failed, or will fail, to work as intended, or (ii) of any claim or intimation of claim by any person, or arising from any dispute, in relation to such replacement of USD LIBOR with an alternative rate, then such SMF Participant shall immediately notify the Bank of such circumstance. 

If the Bank notifies an SMF Participant that it has waived the applicable USD LIBOR linked haircut add-ons due to the SMF Participant relying on the application of the US Adjustable Interest Rate (LIBOR) Act, such SMF Participant must promptly notify the Bank of any amendments made to the US Adjustable Interest Rate (LIBOR) Act following the date of the Bank’s notification. 

The Bank reserves the right to re-assess eligibility of any USD LIBOR Linked Collateral at any time.

In respect of any Loan Portfolio containing both USD LIBOR Linked Loans and other loans, an SMF Participant may choose to either remove the USD LIBOR Linked Loans from such Loan Portfolio or, alternatively, split the Loan Portfolio subject to both meeting the Bank’s other collateral eligibility requirements. 

Eligibility

This Market Notice sets out the following on the eligibility of USD LIBOR Linked Collateral:

  • all USD LIBOR Linked Collateral issued or originated from (and including) 1 April 2021 and prior to 1 January 2022 will be ineligible for use in the SMF unless the Bank is satisfied (in its sole discretion) that such USD LIBOR Linked Collateral benefits from a robust fallback or a future rate switch mechanism that meets the applicable conditions described in this Market Notice in addition to the Bank’s other eligibility requirements;
  • all securities issued from (and including) 1 January 2022, where the issuer is currently paying, will revert to paying, or may be required to pay, a coupon or any other amount calculated by reference to USD LIBOR will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch; 
  • all securities issued from (and including) 1 January 2022, where embedded swap payments are calculated, will revert to being calculated, or may be required to be calculated, by reference to USD LIBOR will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch;
  • all securities issued from (and including) 1 January 2022, backed by one or more loans where the borrower is currently paying, will revert to paying, or may be required to pay, interest or any other amount calculated by reference to USD LIBOR  will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch;  
  • all loans originated from (and including) 1 January 2022, where the borrower is currently paying, will revert to paying, or may be required to pay, interest or any other amount calculated by reference to USD LIBOR will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch; and 
  • from (and including) 30 June 2023, all USD LIBOR Linked Collateral, regardless of the issuance or origination date, will be ineligible for use in the SMF with the exception of USD LIBOR Linked Collateral that has been provided to the Bank prior to 30 June 2023 and which benefits from a future rate switch mechanism that meets, and continues to meet, the applicable conditions set out in this Market Notice in addition to the Bank’s other eligibility requirements. 

Except as described above, SMF Participants may otherwise request to provide USD LIBOR Linked Collateral to the Bank until 30 June 2023, subject to the conditions set out in this Market Notice and the Bank’s other collateral eligibility requirements.

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