Working Group updates (2019 onwards)
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.