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 6 July, the Chair referred to the statement by the FCA on 3 July which confirmed that the US dollar LIBOR panel ceased on 30 June 2023, as planned.
The FCA introduced its Feedback Statement (FS23/2) on its previous Consultation Paper (CP22/21) and the related announcement by the FCA regarding publication of synthetic US dollar LIBOR. The Chair also drew BMSG members’ attention to the statement on 3 July by IOSCO relating to alternatives to US dollar LIBOR.
The Chair reminded BMSG members that parties to bond contracts still referencing synthetic US dollar LIBOR should be taking steps to transition to appropriate reference rates ahead of the FCA’s proposed date for the permanent cessation of the synthetic rate on 30 September 2024. At the Chair’s invitation, four law firms represented on the BMSG made a presentation covering the topics listed below. It was noted that the presentation did not represent legal advice:
- FRNs: Type 1, 2, 3 and other fallbacks under English law.
- Consent solicitations under English law.
- Securitisations, including negative consents, under English law.
- The relationship between transition under English law, the US LIBOR Act and other foreign laws.
- Operational issues, including bank polling and use of advisers.
BMSG members reviewed progress on active transition of (i) synthetic US dollar LIBOR bonds in the form of Floating Rate Notes (“FRNs”) maturing after the FCA’s proposed cessation date for synthetic US dollar LIBOR (30 September 2024), and (ii) 3-month synthetic sterling LIBOR bonds in the form of FRNs maturing after the FCA’s proposed cessation date for synthetic sterling LIBOR (28 March 2024). Finally, BMSG members received a short update on recent developments in the new issue market referencing SONIA and SOFR.
The Loan Enablers Task Force (the “LETF”)
Chair: Marc Meyer HSBC
The LETF met on 7 July. The FCA introduced its notice published on 3 July relating to cessation of the US dollar LIBOR panel. It was also noted that the notice included statements relating to (i) the FCA’s decision to require continued publication of the 1-, 3- and 6-month US dollar LIBOR settings on a synthetic basis and (ii) permanent cessation of the overnight and 12-month US dollar LIBOR settings. The FCA also referred to publication of its feedback statement (FS23/2) on 31 May regarding publication of synthetic US dollar LIBOR.
The FCA referred to the IOSCO statement published on 3 July, which stated that Term SOFR rates are suitable for limited use only. It was noted that this assessment was consistent with the United States’ Alternative Reference Rates Committee’s (“ARRC”) best practice recommendations and the Chicago Mercantile Exchange’s terms and conditions. It was also noted that the statement reinforced regulatory concerns relating to the use of credit sensitive rates (“CSRs”), which contained embedded risks similar to those present in LIBOR. The FCA noted that CSRs should not be used as successor rates to US dollar LIBOR and advised UK regulated firms to engage the FCA prior to using such rates. The Bank of England referred LETF members to the FPC record which provided its position on Term SOFR usage and the use of CSRs.
UK Finance delivered a read-out of the Financial Ombudsman Service (“FOS”) Small Business Complaint decision relating to the process of transition away from LIBOR. It was noted that the FOS found against the complainant on all four headings of the complaint, which provided reassurance to LETF members as the FOS decision was made on the basis that the responding institution followed relevant regulatory guidance and the published recommendations of the Working Group.
LETF members noted that in their view US dollar LIBOR panel cessation on 30 June had gone relatively smoothly and whilst not all legacy contracts had transitioned yet to an appropriate risk free rate, there were no material concerns to note.
Finally, the Loan Market Association (“LMA”) presented a paper relating to an issue of SOFR not being published on Good Friday (7 April 2023) and the related impact for non-US law contracts based on the LMA exposure draft.