Minutes of the Working Group on Sterling Risk-Free Reference Rates - September 2021

The Working Group on Sterling Risk-Free Reference Rates, which is comprised of a diverse set of market participants, is working to catalyse a broad-based transition to SONIA by end-2021.
Published on 26 October 2021

Date of meeting: 15 September 2021 | Location: Virtual meeting


1. Standing Items

  • Competition law reminder
  • Welcome & introductions
  • Roadmap updates

2. Update from the authorities

  • FCA consultations
  • Term SOFR & Credit sensitive rates
  • Critical Benchmarks Bill

3. Derivatives update

  • SOFR first
  • RFR first for cross-currency derivatives
  • SONIA first for exchange traded derivatives

4. Focus on end-Q3 active transition milestone

  • Update from FCA and Bank of England
  • Discussions
  • Priorities for the rest of the year

5. Update from Sub-Groups and Task Forces

  • Non-Linear Task Force
    • Bond Market Sub-Group
    • Loan Enablers Task Force
    • Infrastructure Sub-Group
    • Communications & Outreach Sub-Group

6. AOB


1. Standing items

The Chair welcomed attendees. The Working Group’s Competition Law Counsel reminded members of their responsibilities under competition law.

The Chair announced that Frances Hinden (Shell) had stepped down as Vice-Chair of the Working Group; Rachael Macpherson was welcomed as Shell’s new representative. In accordance with the Working Group’s terms of reference, Sarah Boyce (Association of Corporate Treasurers) had been appointed by the FCA and Bank of England as a new Vice-Chair, reflecting the importance of maintaining strong corporate representation. Alexandre Papadacci (AXA) would remain as a Vice-Chair.

The Chair noted that the Working Group was currently scheduled to meet twice more before the end of the year and provisionally once more in the early months of 2022 at which point it would assess future requirements. The Bank and FCA acknowledged the Working Group as a very useful forum for co-operation between the official sector and industry, and in identifying and tackling barriers to transition. The official sector would seek to communicate with members on remaining transition developments into 2022 and beyond.

2. Update from the authorities

2a. FCA consultations

The FCA had consulted on the ‘synthetic’ publication of 6 LIBOR currency tenor pairs for sterling and Japanese Yen for a limited time period after end-2021. This consultation closed on 27 August and the FCA would publish its final decision as soon as practicable and by the end of September.

The policy decision would be accompanied by a consultation on the FCA’s proposals as to precisely which legacy contracts would be able to use synthetic LIBOR, and on use of its powers to limit use of USD LIBOR in new contracts after the end of 2021.

2b. Term SOFR and Credit sensitive rates

The Bank of England noted significant progress in US dollar transition in July, following a successful ‘SOFR First’ initiative coordinated with the US. The US Alternative Reference Rates Committee (ARRC) had since recommended CME’s forward-looking term SOFR rate, and had published conventions and best practices for its use.

The FCA and PRA set out in their March 2021 ‘Dear CEO’ letter that market participants should use the most robust alternative rates and follow relevant industry guidelines. In that context, the ARRC’s recommended best practice for term SOFR would be relevant for US dollar business in London, while the somewhat narrower term SONIA use cases identified by the FICC Markets Standards Board (FMSB) and the Working Group would remain the relevant reference points for sterling. Guidance should be followed for each currency respectively including in multi-currency facilities, and for sterling markets, compounded in arrears SONIA would be the most robust rate.

In relation to credit sensitive rates, the Bank of England and FCA had been clear in their view that these do not address the fundamental weaknesses of LIBOR. They continued to encourage the market to access the most robust risk-free rate alternatives for their use cases, and to minimise the risk of another costly transition in the future.

The International Organization of Securities Commissions (IOSCO) had published a statement on credit sensitive rates highlighting that compliance with IOSCO Principles for financial benchmarks is not a one-off exercise and calling on benchmark providers to consider how they would continue to meet IOSCO Principles if use of their benchmark became widespread.

The FCA noted that UK regulated firms looking to use credit sensitive rates should speak to the FCA before doing so. If these rates were used, firms should ensure robust fallbacks were in place. Selecting another credit sensitive rate based on the same underlying markets would unlikely be appropriate, nor would relying on the FCA to select a fallback rate.

2c. Critical Benchmarks Bill

Representatives from Her Majesty’s Treasury (HMT) joined the meeting to provide an update on the Critical Benchmarks Bill, which was introduced to Parliament on 8 September. The Bill provided legal certainty as to how references to a critical benchmark, such as LIBOR, should be treated once the FCA had provided for that benchmark to be published with a changed methodology, such as synthetic LIBOR. It also provided a targeted immunity for the administrator of such a critical benchmark.

HMT planned to conduct broader market engagement in the near future.

3. Derivatives update

The FCA highlighted a number of market convention switches that had taken place since the last meeting, including in Japanese and Swiss interdealer interest rate swap markets. Both initiatives saw marked progress in the adoption of TONA and SARON respectively.

The ‘SOFR First’ initiative for US dollar linear interest rate swap markets took place on 26 July, following global co-ordination and effort. There had since been significant progress in SOFR uptake, with approximately 35% of the market referencing SOFR in new business. Two dealer-bank members noted the initiative had landed well, with the interdealer market responding more rapidly than expected with the SOFR share estimated at greater than 80%. The FCA noted the importance of this initiative in light of supervisory guidance from US regulators, and others globally, to cease new use of USD LIBOR no later than the end of 2021.

These initiatives had formed a good platform for the globally co-ordinated ‘RFR First’ initiative for cross-currency swaps which was scheduled for 21 September. The Communications & Outreach Sub-Group planned to raise awareness for the initiative.

The FCA noted that the ‘SONIA first’ switch in exchange traded futures had been less successful than previous initiatives, but acknowledged that the market was more diverse than other targeted markets. However, open interest in SONIA futures had more than doubled from 10% to 22%, indicating a steady shift. The Bank noted, however, that progress in the adoption of SONIA in exchange traded options had been much stronger with SONIA options accounting for around 35% of the market which was a marked increase from less than 5% prior to the initiative. The FCA and Bank of England would continue to monitor progress and engage with relevant market participants, and encouraged members to persist with this effort.

4. Focus on the end-Q3 active transition milestone

The Bank noted that the Working Group’s end-Q3 active transition milestone, which had received regulatory support from the PRA and FCA, was important to establish dialogue between financial providers and end-users and to avoid a compression of resources towards year-end. The Bank had seen good momentum across firms in engaging with their clients and actively transitioning legacy LIBOR contracts in recent weeks.

The Bank and FCA reiterated that synthetic LIBOR was a temporary solution and that firms would be expected to make continued efforts to actively reduce their stock of outstanding LIBOR exposures beyond end-Q3 and into 2022 where relevant.

One trade association member noted they were seeing very good progress in active conversion among corporates, with feedback suggesting high levels of outreach and engagement between banks and end users.

Members highlighted the need for further messaging that synthetic LIBOR would not be a permanent solution and the continued need for active transition beyond end-Q3 2021.

5. Priorities for the rest of the year

The Co-Chair of the Non-Linear Task Force (NLTF) highlighted that ISDA had published a Supplement to implement new fallback provisions for the GBP LIBOR ICE Swap Rate and documentation to apply the new fallbacks to legacy contracts, based on the formula previously published by the NLTF. This would provide a clear transition option for GBP LIBOR referencing swaptions. The NLTF had also provided feedback to LCH on its proposal to continue clearing LIBOR swaptions after the end of 2021. LCH acknowledged receipt of this paper and intended to make a statement shortly.

The main priorities of the Bond Market Sub-Group and Loan Enablers Task Force were focused on legacy contracts referencing GBP LIBOR and any further work would be determined by the rate of progress and reaction to the publication of tough legacy and synthetic LIBOR arrangements.

The Infrastructure Sub-Group did not have an active pipeline of work, but continued to monitor progress and was ready to address any issues raised by members.

The Communications and Outreach Sub-Group would look to highlight upcoming transition developments through its usual communications channels and would remain ready to support other Sub-Groups and Task Forces as needed.


Private sector attendees

Tushar Morzaria - Barclays (Chair)

Paul Mansour - Barclays (Chair’s Office)

Andreas Giannopoulos - Barclays (Chair’s Office)

Helen Robinson - Barclays (Chair’s Office)

Joseph McQuade - Barclays (Chair’s Office)

Alan Coutts - Aberdeen Asset Management

Sarah Boyce - Association of Corporate Treasurers

Alexandre Papadacci - Axa

Katherine Ashdown - Bank of America

Snigdha Singh - Bank of America

Jonathan Brown - Barclays

Robert Mitchelson - Blackrock

Greg Olsen - Clifford Chance (Competition Law Counsel)

Zsolt Szollosi - Credit Suisse

Michael Barron - Deutsche Bank

Martial Collet-Billon - Deutsche Bank

Axel van Nederveen - EBRD

Alan Farrell - Goldman Sachs

John O’Sullivan - HSBC

Matthew Horton - ICE Futures Europe

Paul Richards - ICMA

Robert Gall - Insight Investment

Galina Dimitrova - Investment Association

Rick Sandilands - ISDA

Scott O’Malia - ISDA

Kari Hallgrimsson - JP Morgan

Guy Whitby-Smith - Legal & General Investment Management

Ian Fox - Lloyds Banking Group

Clare Dawson - Loan Market Association

Philip Whitehurst - LCH

Siobhan Clarke - M&G

Katarzyna Abendan - M&G

David Covey - M&G

Kwok Liu - National Grid

Tom Dyson - Nationwide

Phil Lloyd - NatWest Markets

Jamieson Thrower - NatWest Markets

Donal Quaid - NatWest Markets

Bob Goodfellow - NatWest Markets

Rachael Macpherson - Shell

Paul Morris - UBS

Daniel Cichocki - UK Finance

Official sector attendees

Alastair Hughes - Bank of England

Arif Merali - Bank of England

Alieda Moore - Bank of England

Hwee Pee - Bank of England

Raza Rehman - Bank of England

Stefania Spiga - Bank of England

Leman Menguturk - Bank of England

Nicole Stirk - Bank of England

Edwin Schooling Latter - Financial Conduct Authority

Helen Boyd - Financial Conduct Authority

Anne-Laure Condat - Financial Conduct Authority

Toby Williams - Financial Conduct Authority

Will Davies - Financial Conduct Authority

Richard Knox - Her Majesty’s Treasury (Item 2c only)

Sebastian Astin-Chamberlain - Her Majesty’s Treasury (Item 2c only)

Joshua Parikh - Her Majesty’s Treasury (Item 2c only)