Transition to sterling risk-free rates from LIBOR

Together with the Financial Conduct Authority (FCA), we are working with market participants to catalyse a transition to using SONIA as the primary interest rate benchmark in sterling markets.

Overview

The Working Group on Sterling Risk-Free Reference Rates (RFRWG) was established in 2015 to implement the Financial Stability Board's recommendation to develop alternative risk-free rates (RFRs) for use instead of Libor-style reference rates.  In April 2017, the Working Group recommended the SONIA benchmark as their preferred RFR and since then has been focused on how to transition to using SONIA across sterling markets. 

Please note the views and outputs of the Working Group are not necessarily endorsed by the Bank of England or the FCA.

Educational resources

We’ve curated a selection of  resources to explain LIBOR transition and set out why all market participants need to act now. You will find regular updates on LIBOR transition on the Working Group’s LinkedIn page.

A factsheet summarising LIBOR transition and explaining why market participants need to act now:

In this July 2020 webinar, the Governor of the Bank of England and President of the New York Fed reiterate the importance of the move away from LIBOR. The Chair of the Sterling RFRWG and the Chair of the ARRC join, to reflect on the progress made and what remains to be done.

This Working Group webinar, in collaboration with the Confederation of British Industry (CBI) and Association of Corporate Treasurers (ACT), equips firms with what they need to know about moving away from LIBOR, provides insights from corporates and banks on their experiences of transition, and the practical steps needed.

The Working Group has published a series of educational videos, providing a background to the key elements of LIBOR transition.

Introduction video and supporting slides

Why do I need to transition away from LIBOR? video and supporting slides

What is SONIA? video and supporting slides

What is a credit adjustment spread? video and supporting slides

Legal and documentation aspects video and supporting slides

What it means for your lending agreements video and supporting slides

Recommended next steps for transition video and supporting slides

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.

Expansion of the Pension Fund and Insurance Company sub-group

The Working Group on Sterling Risk-Free Reference Rates hosted two buy-side roundtables events in January 2020, which sought to identify obstacles to the adoption of SONIA and highlight critical dependencies on LIBOR. As a result of those informative roundtable discussions, the Working Group intend to expand the Pension Fund and Insurance Company sub-group to support broader participation amongst the buy-side sector. This expanded group will build on its earlier work to minimise systemic and financial stability risks resulting from LIBOR transition to pension funds, insurance companies and asset managers. Whilst existing members of this sub-group will stay on, we invite further expressions of interest to join this sub-group. 

For more details or to express interest, please contact RFR.Secretariat@bankofengland.gsi.gov.uk.  

Statement on PRA reprioritisation and supervisory engagement on LIBOR (May 2020)

The Prudential Regulation Authority (PRA) published a statement detailing the reprioritisation of its work due to the impact of COVID-19. In light of recent developments, including the May Interim Financial Stability Report statement on LIBOR, the PRA will resume full supervisory engagement on LIBOR from 1 June 2020.

Further statement from the RFRWG on the impact of Coronavirus on the timeline for firms’ LIBOR transition plans

Further to the joint statement made on 25 March it remains the central assumption that firms cannot rely on LIBOR being published after the end of 2021. The FCA and the Bank of England have worked with members of the Working Group on Sterling Risk-Free Reference Rates (RFRWG) and its sub-groups and task forces to consider how all firms’ LIBOR transition plans may be impacted by Coronavirus. 

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.  

The aggregated and anonymised summary of responses prepared by the RFR secretariat of the market-led Working Group, as well as the Working Group’s consultation can be found in the links below. The Working Group will discuss the results at its forthcoming meetings, including consideration of potential next steps on how these results can help catalyse further transition in sterling cash markets.

Working Group announcements: progressing towards key 2020 milestones – March 2020

The Working Group on Sterling Risk-Free Reference Rates has issued a statement welcoming the Bank of England’s discussion paper on the publication of a SONIA compounded index to further support the widespread use of SONIA compounded in arrears. The statement outlines how bond markets can use the proposed SONIA index and its relevance for issuers’ choice of conventions.

The Working Group’s Loan Enablers Task Force has published an indicative roadmap outlining a path for the discontinuation of new Sterling LIBOR-based cash lending by end-Q3 2020. This roadmap is intended to act as a guide for lenders, borrowers and infrastructure providers. The roadmap is focused particularly on the development of products referencing compounded SONIA as the primary risk-free rate in sterling markets.

In addition, the Bank of England and FCA jointly wrote to trade associations setting out how LIBOR transition will affect their members and stakeholders, and calling for organisations to raise awareness among their networks and offered next steps and educational material from the Working Group’s Communications sub-group to support this.

Tough Legacy; Cash Market Legacy Transition and Loans Flow Enablers Task Forces

The Working Group on Sterling Risk-Free Reference Rates agreed to set up three new task forces, focusing on (i) enablers to moving new loans issuance away from GBP LIBOR (Loan Flow Enablers Task Force), (ii) frameworks to support transition of legacy cash products (Cash Market Legacy Transition Task Force), and (iii) providing market input regarding the ‘tough legacy’ of products that may prove unable to be converted or amended to include robust fallbacks (Tough Legacy Task Force). 

We have welcomed the strong interest from experts in the market to be involved in these task forces. The expressions of interest received during our request period have been registered and the work of the task forces is now being taken forward.

If you would like more information please contact RFR.Secretariat@bankofengland.co.uk.

Summary of results - Survey of dealers in non-linear Sterling interest rate derivatives

The Bank of England and FCA, as the secretariat of the market-led Working Group on Sterling Risk-Free Reference Rates, conducted a survey of 15 dealers in non-linear Sterling interest rate derivatives to understand the preferred approach of market participants for the trading of interbank SONIA swaptions and caps and floors. The aggregated and anonymised summary of the results can be found in the link below:

Next steps for LIBOR Transition in 2020: the time to act is now

On 16 January 2020, the Working Group on Sterling Risk-Free Reference Rates, Bank of England and FCA jointly published a set of documents, outlining priorities and milestones for 2020 on LIBOR transition.

The material published by the Working Group highlights important events over 2020 and clarifies actions that market participants should take to reduce their LIBOR exposure ahead of end-2021 and transition to alternative rates. Market participants are encouraged to refer to:

A paper setting out the Working Group’s views on the appropriate use of SONIA compounded in arrears for businesses and clients, and guidance for where the use of alternative approaches, such as a Term SONIA Reference Rate, may be necessary:

A statement considering helpful ‘lessons learned’ from recent conversions of legacy LIBOR contracts:

A factsheet for end-users summarising LIBOR transition and setting out why market participants need to act now:

The Working Group’s consultation (published in December) on credit adjustment spread methodologies for cash products, seeking feedback by 6 February 2020. 

The Bank and FCA support the Working Group’s 2020 objectives and have published two documents designed to further catalyse transition efforts.

A letter from the FCA and the Bank to major banks and insurers setting out initial expectations of firms’ transition progress during 2020. 

A statement encouraging market makers to switch the convention for sterling swaps from LIBOR to SONIA on 2 March 2020, designed to help progress transition in the derivatives market.

Buy-side Sector Roundtable event 

The Working Group on Sterling Risk-Free Reference Rates, in conjunction with the Bank of England and FCA, would like to invite buy-side market practitioners (e.g. traders, hedge fund managers, portfolio managers) to attend one of two roundtable events, on 24 and 31 January. The Working Group welcome interested practitioners with relevant expertise to join discussions on the buy-side barriers to LIBOR transition, dependencies on LIBOR and steps taken by firms to develop SONIA products.

If you would like to express your interest to attend, please contact RFR.Secretariat@bankofengland.gsi.gov.uk.

Invitations for membership of the Tough Legacy; Cash Market Legacy Transition and Loans Flow Enablers Task Forces

The Working Group on Sterling Risk-Free Reference Rates would like to open invitations to join three new task forces, focusing on (i) enablers to moving new loans issuance away from GBP LIBOR, (ii) frameworks to support transition of legacy cash products, and (iii) providing market input regarding the ‘tough legacy’ of products that may prove unable to be converted or amended to include robust fallbacks. The invitations to these three Task Forces are open to interested market participants with relevant expertise.

In the case of the Tough Legacy Task Force, the work will be building on the work of the Regulatory Dependencies Task Force to deliver a near-term output establishing the expected extent of these issues and likely market outcomes in the event of LIBOR cessation, any particular factors which lead contracts to be less likely to be able to convert, and any potential mitigants suggested by market participants to address the risks identified. 

The Cash Market Legacy Transition Task Force will produce a discussion paper to support awareness of potential approaches to either actively convert existing contracts to alternative rates or update those contracts to include robust fallback language. This will also explore a range of key considerations around these approaches and solicit feedback on whether there are areas where further clarity is needed. 

The Loans Flow Enablers Task Force will support the achievement of the Working Group’s target of ceasing GBP Libor issuance by Q3 2020. It will include articulating key milestones, dependencies and potential blockers to achieving this target.

If you would like to express your interest in joining any of the three Task Forces, please contact the RFR Secretariat.

Workshop for Treasury Management System providers

The Working Group on Sterling Risk-Free Reference Rates invited Loan/Treasury Management System providers to discuss their readiness to incorporate compounded SONIA capability in their products at a workshop arranged by the Infrastructure sub-group on 23 January 2020. Material from the event is available below.

Letters to European Commission, Basel Committee on Banking Supervision, Prudential Regulation Authority and Financial Conduct Authority – October 2019

The Working Group on Sterling Risk-Free Reference Rates wrote to domestic (Prudential Regulation Authority and Financial Conduct Authority) and international (European Commission and Basel Committee on Banking Supervision) authorities regarding regulatory barriers to transition away from LIBOR. These letters request that the issues raised are considered and concrete actions are taken where necessary to ensure a smooth transition reducing risks to safety and soundness from continued reliance on a benchmark that is expected to cease at the end of 202

Senior Advisory Group Terms of Reference – September 2019

The Risk-Free Reference Rate Working Group has published the Terms of Reference for the Risk-Free Rates Senior Advisory Group. The Working Group determined it would benefit from a Senior Advisory Group to provide strategic support and senior engagement in firms to help achieve the Working Group’s deliverables and objectives.

Conventions for referencing SONIA in new contracts, and considerations for loans processing systems – August 2019

The Working Group on Sterling Risk-Free Reference Rates has published a statement and an aggregated summary of responses to the March 2019 Discussion Paper on SONIA conventions and referencing SONIA in new contracts. The discussion paper captured the most significant conventions identified at the time by the Working Group. 

The purpose of this document is to continue to support market participants in their adoption of SONIA, and provide further information when referencing SONIA in bonds, loans and derivatives.

In addition, the Infrastructure sub-group published a working paper to aid in the operational processing of loans referencing alternative risk free rates, focusing on potential enhancements to loans systems for vendors and proprietary system owners. The sub-group has also published an update to its standing priority list.

Letter to European Insurance and Occupational Pensions Authority (EIOPA) – July 2019

The Working Group on Sterling Risk-Free Reference Rates wrote to the European Insurance and Occupational Pensions Authority (EIOPA) to welcome its decision to add the monitoring of LIBOR transition to their 2019 priorities. The Working Group recognises EIOPA’s planned review of Solvency II in 2020, and would be grateful for further details regarding changes to the Solvency II risk-free reference rate. The letter would welcome EIOPA’s consideration of a pan-European taskforce to address regulatory barriers to LIBOR transition.

LIBOR transition event – June 2019

The Bank of England, FCA and Working Group jointly hosted a panel-based event ‘Last Orders: Calling Time on LIBOR’ on 5 June. Find out what was discussed, including the ‘Dear CEO’ thematic feedback, and watch a recording of the event here.

Progress on adoption of risk-free rates in sterling markets

On 15 May 2019, a statement was released on behalf of the Working Group to update on progress in the adoption of SONIA in sterling markets, including work currently underway to develop a term benchmark based on that risk-free rate.

As mentioned in the statement, the benchmark administrators that have confirmed they are working on the development of a Term SONIA Reference Rate are FTSE Russell, ICE Benchmark Administration and Refinitiv. More recently, IHS Markit also confirmed they are working to develop a term SONIA rate. Each administrator presented on their respective work to the Working Group, and these presentations are available to download below.

SONIA task forces

The Working Group agreed to set up three priority task forces on SONIA to look at term rates, accounting treatment and regulatory dependencies.

We have welcomed the strong interest from experts in the market to be involved in these task forces. The expressions of interest received during our request period have been registered and the work of the task forces is now being taken forward.

If you would like more information, or to express your interest, please contact RFR.Secretariat@bankofengland.co.uk.

Letter to the International Accounting Standards Board – March 2019

On 18 March, the Working Group on Sterling Risk-Free Reference Rates wrote to the International Accounting Standards Board (IASB) to extends its support to the IASB on risk-free rate transition. 

The Working Group welcomes the IASB’s decision to add the IBOR Reform and the Effects on Financial Reporting project to its Standard Setting agenda. The Working Group also welcomes the IASB’s decision to prioritise the analysis of the accounting issues affecting financial reporting. The letter sets out how the Working Group could provide support and outlines its assessment of the priority technical accounting issues that need to be addressed as soon as possible.

This letter is available to download below. If there are specific topics, questions or feedback you would like to share with us, please contact the RFR Secretariat on the following email address: RFR.Secretariat@bankofengland.co.uk.

Discussion paper on market conventions for SONIA - March 2019

The Working Group on Sterling Risk-Free Reference Rates has published its discussion paper on SONIA market conventions and further considerations for referencing SONIA. 

The purpose of this discussion paper is to raise awareness on these market conventions for a broad range of market participants that seek to reference SONIA in new contracts and to support the preparedness of infrastructure service providers for the continued growth of SONIA referencing products. This discussion paper delivers a key milestone for the Working Group to communicate best practice for referencing SONIA across bonds, loans and derivatives.

The discussion paper is available to download below. If you would like to share any specific feedback or questions with us, please contact the RFR Secretariat on the following email address: RFR.Secretariat@bankofengland.co.uk.

Infrastructure Forum – 31 January 2019

The Infrastructure Forum enabled the RFRWG to engage with infrastructure and systems providers on key impacted markets and to better understand any outstanding issues - and potential solutions - for infrastructure to support the development of SONIA and other RFR linked products. 

Infrastructure firms play a key role in supporting a successful transition to RFR and helping to reduce the financial stability risks arising from the widespread reliance of financial markets on LIBOR. The RFRWG (supported by the Bank of England and the Financial Conduct Authority) are grateful for the engagement received to date in this market-led transition effort. 

Slides of the presentation and a summary note of the forum is available to download in the documents section below. If there are specific topics or questions that you would like to share with us, please contact the RFR Secretariat on the following email address: RFR.Secretariat@bankofengland.co.uk.

Catalysing transition to SONIA as the risk-free rate (2018)

The Working Group’s mandate is to catalyse a broad-based transition to using SONIA – the market’s preferred risk-free rate – as the primary sterling interest rate benchmark in bond, loan and derivatives markets, over the next four years. That reflects concerns about the sustainability of Libor beyond 2021.

The Working Group on Sterling Risk-Free Reference Rates (RFRWG) issued a consultation on forward-looking Term Sonia Reference Rates (TSRR) on 17 July 2018, that closed on 26 October 2018.  The consultation attracted 45 responses from a wide variety of market participants.  The RFRWG published a summary of responses on 23 November 2018, compiled by the Bank of England acting as RFR Secretariat.

The membership of the Working Group includes banks and dealers, investment managers, non-financial corporates and other sterling issuers, infrastructure firms and trade associations. We have published the full list of member firms and membership selection criteria.

We invite further expressions of interest in participating in transition work either as members of technical sub-groups or market sector forums to share views on aspects of the transition. This includes expressions of interest from professional services firms, in particular accountancy firms, law firms and financial consultancies where the work would be on a pro bono basis to provide expert input to the working group and related sub-groups.

*Please note: Market participants and professional service firms expressing their interest should not use their participation or contribution for marketing purposes.

For more details or to express interest, please contact RFR.Secretariat@bankofengland.co.uk.

The choice of SONIA as the risk-free rate (2015 to 2017)

In the Working Group’s first phase they considered available risk-free rates and in April 2017, following two years of deliberations, the Working Group announced SONIA as its’ preferred risk-free interest rate benchmark for use in sterling derivatives and relevant financial contracts.  

The Working Group published a White Paper explaining its choice, seeking feedback on approaches to adoption and a gaining a better understanding of the views of a broad set of stakeholders. Feedback to the White Paper – and at an industry Roundtable hosted  by the Working Group in July 2017 – confirmed strong support for SONIA as the preferred sterling risk-free rate.

PDFWhite Paper: SONIA as the risk-free rate and approaches to adoption

This page was last updated 22 September 2020

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