Following the cessation of most LIBOR settings at the end of 2021, the Working Group on Sterling Risk-Free Reference Rates (the “Working Group”) concluded at its January meeting that it had met its objective to “catalyse a broad-based transition to SONIA across sterling derivative, loan and bond markets”.
Following this meeting, the Working Group confirmed that all Sub-Groups and Task Forces – except for the Bond Market Sub-Group, Loan Enablers Task Force and Communications and Outreach Sub-Group – would close as the Working Group moves into 2022 in a new form, with new objectives, and with continued support from the Bank of England and FCA.
The new overall objective is to assist in finalising the transition away from LIBOR, via:
- Supporting the continued active transition of legacy contracts from synthetic sterling LIBOR to SONIA, and
- Considering any implications of non-sterling LIBOR transition in UK markets.
To aid transparency in its new form, the Working Group will publish summaries of the meetings of its Sub-Groups and Task Forces. Please see below for summaries of recent meetings.
The Bond Market Sub-Group (the “BMSG”):
Chair: Paul Richards ICMA
At the BMSG meeting on 18 April, the main agenda item related to the FCA decision announcement of 3 April which stated that (amongst other things): (i) when panel bank US dollar LIBOR ceases on 30 June 2023, the use of synthetic US dollar LIBOR will be permitted in all legacy contracts (except cleared derivatives) in 1-, 3- and 6-month settings until 30 September 2024; and (ii) synthetic US dollar LIBOR will be calculated using the relevant CME Term SOFR Reference Rate plus the respective ISDA fixed spread adjustment (which BMSG members noted was the same rate as that proposed by the Federal Reserve under the US LIBOR Act).
At the meeting, the FCA introduced its decision announcement relating to synthetic US dollar LIBOR, and the FCA and the Bank of England also introduced their joint statement on 12 April, with the Chair of the Working Group, which sets out the broader context for the ongoing transition from US dollar LIBOR to SOFR. BMSG members noted the announcements were clear and observed that the clarifications provided had been welcomed by the market.
BMSG members discussed: the implications of the FCA’s decision announcement for the active transition of legacy US dollar LIBOR bonds ahead of the FCA’s proposed cessation date for synthetic US dollar LIBOR on 30 September 2024; and progress on active transition of 3-month synthetic sterling LIBOR bonds ahead of the FCA’s proposed cessation date of 28 March 2024. BMSG members also discussed: legacy US dollar LIBOR bond fallbacks under English law; successor ICE Swap Rates and calculation agency discretions in legacy US dollar LIBOR bonds; and the US DTCC’s LIBOR replacement index communication tool. Finally, BMSG members received a short update on the development of the new issue market referencing SONIA and SOFR.
The Loan Enablers Task Force (the “LETF”)
Chair: Marc Meyer HSBC
The LETF met on 28 April. The FCA and the Bank of England discussed: the FCA decision announcement of 3 April relating to synthetic US dollar LIBOR, which set out the FCA’s decision to require LIBOR’s administrator to continue the publication of the 1-, 3- and 6-month US dollar LIBOR settings on a synthetic basis for a short period following cessation of the US dollar LIBOR panel on 30 June 2023, using an unrepresentative synthetic methodology; and other recent official sector announcements and publications. LETF members welcomed these announcements and confirmed they had not been notified of any questions or concerns from participants or members of the industry associations that they represented.
LETF members noted that firms continued to focus on the active transition of legacy loans that reference US dollar LIBOR, and with US dollar LIBOR due to cease on 30 June 2023 attendees noted that they observed no concerns with transitions progressing. LETF members were informed of the announcement by the Hong Kong Monetary Authority (“HKMA”) to corporate treasurers reinforcing the need to complete the transition of contracts referencing US dollar LIBOR ahead of cessation of that rate on 30 June 2023. Members noted they had observed continued challenges relating to the transition of US dollar LIBOR with respect to certain types of facilities and in certain jurisdictions, with some borrowers continuing to propose Cost of Funds as the fallback reference rate in contracts referencing Term SOFR due to the absence of an appropriate alternative term rate, although it was noted that this was not an issue in the sterling or UK markets. Members noted that there was a need for additional guidance on the lack of robustness of Cost of Funds as a fallback reference rate to which lenders could refer to during negotiations with borrowers.
LETF members were informed by the Bank and FCA of the update by the Alternative Reference Rate Committee (“ARRC”) of its Term SOFR Scope of Use Best Practice Recommendations on 21 April 2023, noting the examples of permitted and non-permitted use cases that members were urged to consider. The headline was that the ARRC had recommended a mild relaxation of the restrictions to allow trading of Term SOFR-SOFR basis swaps with non-dealers (such as hedge funds and/or asset managers) to offset the risk taken on by dealers. However, it was noted that inter-dealing trading on Term SOFR derivatives is still prohibited, which includes Term SOFR-SOFR basis swaps.