Transition to sterling risk-free rates from LIBOR

Together with the 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 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.

Working Group updates (2019 onwards)

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.  

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 2021. 

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.

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.

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 25 March 2020
Was this page useful?
Add your details...