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 24 January, the FCA thanked BMSG members for their responses to FCA CP22/21 on ‘synthetic’ US dollar LIBOR and confirmed that the FCA expected to announce its final decisions in late Q1 or early Q2 2023. In the meeting, there was a consensus among BMSG members that, in their opinion, when panel bank US dollar LIBOR ceases on 30 June 2023, synthetic US dollar LIBOR would be essential for outstanding legacy US dollar LIBOR bonds under English law; that the rate should be the same as the rate announced by the Federal Reserve Board under the US LIBOR Act; and that all legacy contracts other than cleared derivatives should be covered. While it was recognised that a realistic target date for cessation of synthetic US dollar LIBOR should encourage active transition, in cases in which this was feasible, there was concern from some members about whether it would be feasible to complete the transition in time for the FCA’s proposed date for the cessation of synthetic US dollar LIBOR on 30 September 2024.
The BMSG then discussed progress on active transition of legacy sterling LIBOR bonds, and the challenges that BMSG members were experiencing in some cases in the active transition of legacy US dollar LIBOR bonds under English law. The BMSG also discussed: continuity of contract between panel bank and synthetic US dollar LIBOR; the relationship between synthetic US dollar LIBOR and the US LIBOR Act, emphasising the importance of checking the terms of individual contracts; publication of synthetic US dollar LIBOR on the same screen as panel bank US dollar LIBOR as a single value; and US dollar LIBOR swap rates.
The Loan Enablers Task Force (the “LETF”)
Chair: Marc Meyer, HSBC
The LETF met on 24 February with a new Chair. It was noted that permanent cessation of synthetic yen LIBOR on 31 December 2022 went smoothly in the view of LETF members. The initial discussion was around sterling transition and the FCA decisions on cessation of synthetic sterling LIBOR. Ahead of the cessation of the 1- and 6-month settings at end-March 2023, there had in the view of LETF members been good progress with significant reduction of PFI loans and associated derivatives referencing 6-month synthetic sterling LIBOR. There are continued interactions by LETF members with firms regarding contracts referencing 3-month synthetic sterling LIBOR, and attendees noted that they currently observed no visible problems with transition progressing.
The major topic of discussion was around US dollar LIBOR transition. All were thanked for their responses to the FCA’s consultation on synthetic US dollar LIBOR with the results expected late Q1 or early Q2 2023. Firms were encouraged to continue progressing active transition ahead of cessation of panel bank US dollar LIBOR at end-June and the FCA reiterated the wording of the Dear CEO letter published in March 2021, that “action needs to be front loaded to deliver demonstrable progress against a risk-based prioritisation of contracts”, remains applicable today.
The Bank and FCA supported and reinforced the statement from the Financial Stability Oversight Council (“FSOC”), giving official sector weight to the US Alternative Reference Rates Committee statement that “a world in which Term SOFR is used across all or most cash products is not a plausible one. Such a world would not be consistent with sustaining a robust market for overnight SOFR derivatives, the foundation for Term SOFR rates. Therefore, the use of Term SOFR must remain limited in line with the recommendations of the FSOC and Financial Stability Board.”