Working Group on Sterling Risk-Free Reference Rates

December 2020

Credit adjustment spread methods for active transition of GBP LIBOR-referencing loans

The Working Group published a paper designed to support loan market participants in considering credit adjustment spreads for active transition, which describes the key methodologies emerging in the loan market and how these compare to the approaches taken in the bond and derivatives markets.

Path for discontinuation of new sterling LIBOR-linked lending by end-Q1 2021

A key priority for the Working Group is the recommended milestone set out in its roadmap to cease issuance of sterling LIBOR-based loan products maturing beyond end-2021 by the end of Q1 2021. The Working Group has published an indicative path to discontinuation of sterling LIBOR-linked lending, intended to act as a guide for lenders, borrowers and infrastructure providers in determining intermediate steps within their firms to meet the end-Q1 2021 timeline.

Open letter to loan system vendors and treasury management system providers

The Chair of the Working Group wrote an open letter to loan system vendors and treasury management system providers, asking them to support their clients and the market in their transition away from LIBOR. System providers are asked to ensure that their software is able to accommodate the Working Group’s loan market convention recommendations ahead of end-Q1 2021.

November 2020

Supporting transition in sterling non-linear derivatives

The Working Group published a paper providing considerations on how a non-linear derivatives market 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 initiation of new sterling 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 Working Group to understand the preferred approach of market participants.

October 2020

Summaries of freely available independent RFR calculators and Beta Term SONIA Reference Rates

The Working Group published:

• A summary of freely available independent RFR calculators - updated in July 2021 (PDF 0.5MB)
• A summary of the key attributes of Term SONIA Reference Rates (TSRRs) published by independent benchmark administrators - updated July 2021 (PDF 0.6MB)Opens in a new windowOpens in a new window - updated January 2021.

These papers aim to keep market participants and vendors informed if they choose to adopt SONIA compounding methods or transition to TSRRs (where such transition is appropriate). In particular, they aim to help them to consider if they need to make any amendments to their systems or products.

Working Group welcomes announcement by ISDA on its IBOR Fallbacks Protocol and IBOR Fallbacks Supplement

The Working Group, the FCA and the Bank of England welcomed 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.

To support firms in planning a smooth transition away from LIBOR, the Working Group publishes a regularly-updated statement of priorities and roadmap for transition. It also makes statements in relation to key developments in transition in sterling markets.

• Active transition of legacy GBP LIBOR contracts - April 2021 (pdf 0.4 MB)
• Statement welcoming announcements on the end of LIBOR – March 2021 (pdf 0.4MB)
• The Working Group’s latest priorities and roadmap for 2020-2021 – updated September 2021 (pdf 0.5MB)
• Webinar (with ACT and CBI): Is your business prepared for LIBOR transition? – September 2020
• Key messages & actions: Is your business prepared for LIBOR transition? - September 2020 (pdf 0.5MB)
• News release: Securing a SONIA-based sterling loan market – September 2020 (pdf 0.3MB)
• Statement: continuing the pace of sterling LIBOR transition – July 2020 (pdf 0.2MB)
• Webinar: LIBOR: Entering the endgame – July 2020
• News release: Next steps for LIBOR transition in 2020: the time to act is now – January 2020
• Factsheet: Calling time on LIBOR: Why you need to act now – January 2020 (pdf 0.3MB)
• Webinar: Last Orders: Calling time on LIBOR – July 2019 Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window

In derivative markets, ISDA Opens in a new window Opens in a new window has led work at the request of the Financial Stability Board (FSB) Opens in a new window Opens in a new window to make robust fallback language Opens in a new window Opens in a new window available for both new contracts, and for legacy contracts, by adhering to its IBOR Fallbacks Protocol Opens in a new window Opens in a new window or bilaterally agreeing to amend existing contractual terms. In a joint statement Opens in a new window Opens in a new window with the Bank of England and FCA, the Working Group encouraged early and widespread adoption of ISDA’s Protocol.

In relation to non-linear derivatives, between December 2019 and February 2020 the Working Group conducted a survey of 15 dealers to understand preferences on conventions for the trading of interbank SONIA swaptions and caps and floors. From this, the Working Group identified a clear need for further transition work on non-linear derivatives and established a dedicated non-linear derivatives task force (NLTF).

Working Group sub-groups and targeted task forces have been initiated to identify and consult on appropriate solutions to overcome specific transition issues affecting sterling bond and loan markets in the transition to alternative rates.

For existing LIBOR-linked bonds and loans, the Working Group and authorities have stressed the importance of actively transitioning legacy products, where possible. This is considered the primary way for firms to achieve certainty of their contractual terms and help avoid ‘cliff edge’ risks of waiting until closer to the end of 2021.

Regulatory barriers

To support a broad-based transition away from LIBOR, the Working Group formed a taskforce to identify various dependencies that could pose barriers to transitioning from LIBOR and potential mitigants to these, which were communicated to the relevant authorities. These letters set out the potential regulatory barriers the Working Group identified:

Infrastructure firms play a key role in the successful transition to risk-free rates. The availability and readiness of systems and infrastructure supporting the use of SONIA and other RFRs will further the adoption of non-LIBOR linked products.

The Working Group regularly engages with infrastructure and systems providers to better understand any outstanding issues (and potential solutions) and their readiness to incorporate compounded SONIA capability in their products. The Working Group’s Infrastructure Sub-Group leads this work. For more detail please see:

The Working Group’s Pension Fund, Insurance and Asset Managers sub-group was formed to consider potential barriers impeding the transition from LIBOR across buy-side markets.

In August 2019, the Working Group welcomed the European Insurance and Occupational Pensions Authority (EIOPA) Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window decision to add the monitoring of LIBOR transition to their 2019 priorities and recognises EIOPA’s planned review of Solvency II in 2020. 

The Working Group welcomed Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window the International Accounting Standards Board’s (IASB) decision to add the IBOR Reform and the Effects on Financial Reporting project to its Standard Setting agenda. 

The Working Group extended its support to the IASB and initiated an Accounting Task Force to identify issues resulting from transition affecting financial reporting. In September 2020, the Working Group responded Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window to the Financial Reporting Council’s invitation to comment on the endorsement and adoption of the IASB’s Phase 2 amendments in the UK.

The Working Group’s preferred sterling risk-free rate, SONIA, is an overnight rate. This has some important differences to LIBOR, which is a forward-looking term rate.

Overnight SONIA compounded in arrears is already widely used as a reference rate in bond and derivative markets, and viewed by the Working Group Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window Opens in a new window as appropriate and likely to be operationally achievable for a large majority (by value) of the sterling lending market that would previously have referenced LIBOR. In the remaining areas alternatives may be required, including a forward-looking term rate, so the Working Group has also sought feedback on the practicalities of catalysing the development and limited use of Term SONIA Reference Rates (TSRRs).

In May 2019, a number of benchmark administrators presented their respective work on TSRRs to the Working Group, including FTSE Russell, ICE Benchmark Administration, Refinitiv and IHS Markit. IHS Markit has since confirmed it is no longer working to develop a term SONIA rate.