Act now in preparation for LIBOR transition in 2020
Mortgage Finance Gazette
Mortgage Finance
5 years ago
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The Bank’s Financial Policy Committee (FPC) says that good progress has been made but firms need to speed up their efforts to ensure they are ready for the closure of LIBOR by the end of 2021.

[See our recent article: lenders must prepare for the end of LIBOR]

To help achieve this, the RFRWG has published its priorities and what actions firms should take to reduce LIBOR exposure and transition to alternative rates. This includes:

  • Ceasing issuance of cash products linked to sterling LIBOR by end-Q3 2020;
  • Throughout 2020, taking steps that demonstrate that compounded SONIA is easily accessible and usable;
  • Take steps to enable a further shift of volumes from LIBOR to SONIA in derivative markets;
  • Establishing a framework for the transition of legacy LIBOR products, in order to significantly reduce the stock of LIBOR referencing contracts by Q1 2021; and
  • Considering how best to address issues ‘tough legacy’ contracts.

The Bank and FCA have also published two documents in support of the RFRWG:

  • A joint letter that has been sent to major banks and insurers setting out the initial expectations of the FCA and PRA of firms’ transition progress during 2020. The FPC will closely monitor the steps being taken.
  • A statement from the Bank and the FCA encouraging market makers to switch the convention for sterling interest rate swaps from LIBOR to SONIA on 2 March 2020. This is designed to help progress transition in the derivatives market.

The RFRWG’s published documents include:

  • A document setting out the RFRWG’s views on which types of business and client should use overnight SONIA, relative to alternatives including forward-looking term rates. This concludes that use of SONIA compounded in arrears is appropriate and operationally achievable for 90% of new loans by value. This is consistent with the RFRWG’s existing expectation that the use of forward-looking term rates will be more limited than the current use of LIBOR. The Bank and FCA supports this conclusion fully.
  • A set of helpful ‘lessons learned’ from recent conversions of legacy LIBOR contracts.
  • A factsheet that makes clear the ‘whys’ and ‘whats’ of LIBOR transition and why all market participants need to act now.

Tushar Morzaria, chair, Working Group on Sterling Risk-Free Reference Rates, commented: “2020 will be a pivotal year in the transition journey, with critical focus on enabling the flow of new business away from sterling LIBOR.

“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, noted: ‘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.”