Working Group updates (2019 onwards)
Supporting transition in sterling non-linear derivatives – November 2020
On 26 November 2020 the Working Group on Sterling Risk-Free Reference Rates published a paper providing considerations on how a non-linear derivatives market based on a risk free rate could be structured using compounded in arrears SONIA. The paper covers a range of products, and is intended to support all users of non-linear derivatives to meet the Working Group’s target milestone for market participants to cease initiating new GBP LIBOR linked non-linear derivatives expiring after 2021 by end Q2/Q3 2021 (except for risk management of existing positions).
The paper expands on the February 2020 results of a survey of 15 dealers in sterling non-linear derivatives conducted by the Bank of England and the FCA to understand the preferred approach of market participants. It recognises that non-linear derivatives used for hedging purposes would benefit from having consistency with cash products based on compounded in arrears SONIA. The view taken by the Working Group is that a fully functioning SONIA-referencing non-linear derivatives market could potentially exist on terms similar to those found in ISDA’s IBOR fallbacks protocol and supplement.
By taking all necessary steps to complete operational transition plans for non-linear derivatives by end Q2/Q3 2021, market participants can reduce the financial stability risks arising from the widespread reliance on GBP LIBOR and to support an orderly transition ahead of end 2021.
Summaries of Freely Available Independent RFR Calculators and Beta Term SONIA Reference Rates - October 2020
The Working Group has published two papers, (i) a summary of the freely available independent RFR calculators on the market and (ii) a summary of the key attributes of Beta versions of Term SONIA Reference Rates (TSRRs) published by independent benchmark administrators. The aim of the papers is to assist market participants and vendors to remain informed and consider whether any amendments may be required to their systems or products if they choose to adopt SONIA compounding methods or transition to TSRRs (where such transition is appropriate).
Working Group statement welcoming the announcement by ISDA on its IBOR Fallbacks Protocol and IBOR Fallbacks Supplement - October 2020
The Working group, the FCA and Bank of England have issued a statement welcoming the announcement by ISDA that its IBOR Fallbacks Protocol and IBOR Fallbacks Supplement will be launched on Friday 23 October 2020, with an effective date of Monday 25 January 2021. The Working Group strongly encourages widespread and early adherence to the Protocol by affected financial and non-financial firms, as appropriate.
Adoption of new quoting conventions for inter-dealer swap trading – September 2020
The Bank and FCA have published a statement encouraging liquidity providers in the sterling swaps market to adopt new quoting conventions for inter-dealer trading based on SONIA instead of LIBOR from 27 October 2020. This proposal has been endorsed by the Working Group and added to its roadmap to help progress transition in the derivatives market.
Working Group response to proposed IASB amendments – September 2020
On behalf of the Working Group, the Accounting Task Force has submitted a response to the Financial Reporting Council’s invitation to comment on the International Accounting Standard Board’s Interest Rate Benchmark Reform — Phase 2 amendment (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) in the UK.
Letter to ICE Benchmark Administration – September 2020
The Working Group on Sterling Risk-Free Reference Rates wrote to ICE Benchmark Administration (IBA) to highlight areas of interest in the derivatives market and request views on the expected status of IBA’s GBP LIBOR ICE Swap Rate in the event that GBP LIBOR ceases or becomes unrepresentative, or of reduced liquidity in GBP LIBOR swaps prior to these events. The letter seeks to better understand IBA’s plans in order for the Working Group to assess the potential impact for legacy non-linear derivatives, and to identify options to promote a smooth and orderly transition in this market.
Transition away from the use of LIBOR materials
The Working Group have published materials to support a wide range of firms in preparing for the transition away from the use of LIBOR ahead of end-2021. In addition, the Working Group will host a webinar on 18 September to raise awareness amongst the corporate sector of LIBOR transition changes taking place and actions needed to prepare for the use of alternative rates.
The RFRWG and authorities have continued to reiterate the importance to actively transition legacy products, in order to increase certainty over contractual terms and help avoid the ‘cliff edge’ risks of waiting until closer to the end of 2021. The Working Group has published two papers providing practical steps and considerations in the active transition of legacy cash products.
The Working Group issued a statement of recommendation in response to the strong consensus reached on the relevant consultation on credit adjustment spread methodologies for cash products. The statement recommends an approach for the credit adjustment spread methodology for use across both cessation and pre-cessation triggers for cash instruments maturing beyond end-2021.
Recommendation on conventions for referencing compounded in arrears SONIA in the sterling loan market – September 2020
In recognition of widespread demand from sterling loan market participants, on 1 September the Working Group released a recommendation on standard market conventions for sterling loans based on compounded in arrears SONIA to support the urgent transition away from the use of LIBOR. The recommendations take into account the overall needs of the sterling loan market as well as a variety of system infrastructure implementation considerations and are intended to support the Working Group’s target for lenders to be able to offer non-LIBOR alternatives to customers by the end of September. These recommendations cover a number of aspects in relation to calculation of interest to support new lending on a SONIA-linked basis, and on the treatment of interest rate ‘floors’ in existing LIBOR-linked contracts moving to SONIA.
The recommendation is based on a range of inputs, including discussions with loan infrastructure providers and other national working groups, as well as a survey of market practitioners within the Working Group and its associated sub-groups and task forces.
Working Group announcements: maintaining progress towards key 2020-2021 milestones – July 2020
On 28 July 2020, the Working Group on Sterling Risk-Free Reference Rates published materials to help firms to prepare for, and implement, LIBOR transition plans.
The Working Group has updated and revised its priorities and roadmap for 2020-2021. This update reflects progress made since the previous roadmap was published in January 2020, and includes more granular milestones to manage the transition away from Sterling LIBOR-linked products by end-2021.
The Working Group has published a question and answer document on its revised end-Q3 milestones for loan markets. This documents explains which loan products fall within the scope of the Q3 milestones and also explains the actions that market participants should take to reduce their reliance on LIBOR ahead of end-2021 and transition to alternative rates.
Roundtable with HMT following recent announcements
On 23 June 2020, HMT announced they are planning to enhance the toolkit of the FCA to deal with the wind-down of critical benchmarks, such as LIBOR, by amending the UK Benchmarks Regulation. This would create a possible way of reducing disruption to holders of 'tough legacy' LIBOR contracts by enabling a continued publication of LIBOR using a different and more robust methodology.
HMT, the FCA and the Bank of England would like to invite you to an online roundtable on 6 August 2020 from 10am to 11am as an opportunity to put forward questions in relation to the HMT and FCA statements and published Q&A.
This event is open to all market participants, not solely those who are members of the working group on sterling risk-free reference rates. Please send expressions of interest and submit questions in advance by 30 July 2020 at noon to RFR.Secretariat@bankofengland.gsi.gov.uk.
Non-Linear Derivatives Task Force
Between December 2019 and February 2020 the Working Group on Sterling Risk-Free Reference rates conducted a survey to understand preferences on conventions for the trading of interbank SONIA swaptions and caps and floors. In the course of this work, and subsequent feedback from market participants, the Working Group identified a clear need for further transition work on non-linear derivatives and so has agreed to set up a new non-linear derivatives task force.
The task force will work to progress and raise awareness of conventions for new RFR-based non-linear products. It will also support discussions on the transition of legacy Libor products in these markets. This is a highly specialised work-stream, and expressions of interest from those with demonstrable expertise to contribute to the task force are welcomed. If you would like more information, or to express your interest, please contact RFR.Secretariat@bankofengland.co.uk.
Paper on the identification of Tough Legacy issues
Tough legacy contracts are considered those that do not have robust fallbacks and prove unable to be amended ahead of LIBOR discontinuation. The industry-led RFR Working Group's Tough Legacy Taskforce has considered 'tough legacy' issues across asset classes in the UK, and has concluded that there is a case for action to address these exposures. The case for action differs by asset class, depending on the contracts involved and the ability to amend the terms. While many contracts will be able to successfully transition, this may be more difficult where, for example (i) contracts form part of complex transactions or arrangements (ii) distribution is broad and there may be additional complications with obtaining the necessary consent (iii) retail counterparties are involved.
To the extent it is feasible, the Taskforce proposes that the UK Government considers legislation to address ‘tough legacy’ exposures. However, the Taskforce recognises that there is no guarantee that such a solution will materialise, that it will materialise across all relevant legal jurisdictions, or that it would be available for all products and circumstances. The Taskforce also recognises that any potential solution may not be economically neutral or suitable for particular contracts.
The RFRWG calls on market participants to continue to focus on active transition, as this is the only way for parties to have certainty over the timing and substance of transition. The approaches explored in this paper are relevant only for those contracts that cannot be dealt with in any other way.