FCA and the Bank of England tell financial firms it’s time to get rid of LIBOR

From: RegTech Analyst

The traditional way banks calculated interest rates if it would borrow from other banks is about to end. And it is time financial services firms prepare for it.

That is the advice of the Bank of England, the Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) are giving financial firms in regard to the end of the London Inter-bank Offered Rate (LIBOR).

LIBOR was highly discredited in the fallout of the 2008 recession.

In the aftermath, it was decided that the benchmark would be swapped for the Sterling Over Night Index Average (SONIA) benchmark.

Now, the organisations are urging market makers to change the market convention on March 2, 2020.

“We have seen great progress in the development of the SONIA derivatives market,” said Edwin Schooling Latter, director of markets and wholesale policy at the FCA. “I encourage all market participants to join the initiative to put SONIA first over LIBOR from 2 March. This should help make SONIA the market standard in sterling swaps as is already the case in the bond market.’

To help the market stakeholders make the change, the organisations have published a set of documents to guide them through the transition.

The roadmap highlights important events and clarify actions market participants should take to reduce LIBOR exposure and transition to alternative rates.

It reminds the market stakeholders to cease issuance of cash products linked to sterling LIBOR by end-Q3 2020, to take steps to adopt SONIA and move legacy products from one benchmark to the other.

The Bank and FCA have also sent a joint letter to major banks and insurers setting out the initial expectations of the FCA and PRA of firms’ transition progress during 2020

“2020 will be a pivotal year in the transition journey, with critical focus on enabling the flow of new business away from sterling LIBOR,” said Tushar Morzaria, chair of RFRWG. “The Working Group on Sterling Risk-Free Reference Rates has therefore defined a key priority to cease issuance of sterling LIBOR cash products by the end of Q3. In conjunction, the RFRWG fully supports the Bank of England and FCA initiative to encourage market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA in Q1 2020.”

Andrew Hauser, executive director for markets at the Bank of England, added, “Today’s suite of publications helps provide greater clarity to the market on a number of issues central to LIBOR transition as we head towards the 2021 deadline. I am particularly encouraged by the ambitious goals that market participants have set for themselves this year – including the aim to cease issuance of cash products linked to sterling LIBOR by 2020 Q3 – and by the steps already taken towards those goals, including the creation of new SONIA-linked loans and the conversion of legacy bonds. The groundwork has been laid for a decisive shift away from LIBOR in 2020.”

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