Statement on the impact of coronavirus on firms’ LIBOR transition plans
The FCA, Bank of England and members of the Working Group on Sterling Risk-Free Reference Rates have discussed the impact of the coronavirus on firms’ LIBOR transition plans over the coming months.
The central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and end-2021 should remain the target date for all firms to meet. The transition from LIBOR remains an essential task that will strengthen the global financial system. Many preparations for transition will be able to continue. There has, however, been an impact on the timing of some aspects of the transition programmes of many firms. Particularly in segments of the UK market that have made less progress in transition and are therefore still more reliant on LIBOR, such as the loan market, it is likely to affect some of the interim transition milestones.
Alongside other international authorities, the Bank of England, FCA and working group will continue to monitor and assess the impact on transition timelines and will update the market as soon as possible.
Summary of responses - Consultation on credit adjustment spread methodologies for fallbacks in cash products referencing GBP LIBOR
The Working Group on Risk-Free Reference Rates is supportive of robust contractual fallback terms being in place to facilitate a smooth transition from LIBOR to SONIA. Such terms should include consideration of a credit spread adjustment to account for differences between LIBOR and SONIA. In the derivatives market, the International Swaps and Derivatives Association (ISDA) consulted on the spread methodology. The ISDA consultation resulted in agreement that a historical 5 year median approach is the most appropriate methodology to be used for sterling LIBOR interest rate swaps.
Following the progress made by ISDA, the Working Group published a consultation paper for the sterling cash market (inc. loans, bonds, and securitisations). This paper considered four methodologies that could be used to calculate the credit adjustment spread for fallback language in sterling cash instruments. The consultation identified a strong consensus in favour of the historical 5 year median approach, in line with the approach adopted by ISDA, as the most appropriate methodology for credit adjustment spreads in both cessation and pre-cessation fallbacks for sterling Libor linked cash products maturing beyond end 2021.