The world's most talked about number: LIBOR 2020

Europe

Yesterday, LIBOR transition was firmly highlighted as a key topic for 2020 with the Bank of England (the Bank), the Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) publishing a series of documents outlining priorities and milestones for the coming year, to ensure firms are preparing for the cessation of LIBOR from the end of 2021. 

These initiatives follow the publication of reports towards the end of last year noting the lack of progress in some areas, particularly the loan markets.

The documents issued yesterday comprise:

1. A statement from RFRWG of its priorities and an updated roadmap for 2020 highlighting important events and clarifying action market participants should take to reduce LIBOR exposure and transition to alternative rates, including:

  • Ceasing issuance of cash products linked to sterling LIBOR by the end of Q3 2020

  • Throughout 2020, taking steps to promote and enable increased use of compounded SONIA

  • 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 number of LIBOR-referencing contracts by Q1 2021

  • Considering how best to address the issues around ‘tough legacy’ contracts.

2. A joint letter from the Bank and the FCA to designated senior managers at major banks and insurers outlining initial expectations of the FCA and the Prudential Regulation Authority on transition progress during 2020, referring to the RFRWG’S targets and the Financial Policy Committee’s close monitoring.

3. 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, to expedite transition in the derivatives market.  The market for SONIA derivatives is already well-established. Average cleared over-the-counter SONIA swaps exceeded £4.5trillion per month over the past six months, and the traded monthly notional value is now broadly equivalent to sterling LIBOR.

4. A package of documents from the RFRWG, including:

  • A working paper with RFRWG’s views on the use of a Term Sonia Reference Rate and the use of overnight SONIA, concluding that use of SONIA compounded in arrears is “appropriate and operationally achievable” for 90% of new loans by value

  •  A note of ‘Lessons learned’ from recent conversions of legacy LIBOR bonds to SONIA by way of consent solicitation

  •  A one-page factsheet outlining the ‘whys’ and ‘whats’ of LIBOR transition and telling market participants “why need to act now

This is effectively a call for action and RFRWG confidently states that “with the tools published [today] and the support of the official sector domestically and internationally, market participants have what they need to leave LIBOR behind”.

The clear message is that market participants on new transactions should be limiting their LIBOR exposure. As we get closer to the end of 2021, parties should also be actively identifying their LIBOR exposure and putting in place remediation plans. CMS recognises that all organisations are different, with different approaches to managing risk, a range of customers and different business focus. We can help you to plan your LIBOR remediation by helping you to identify exposures, develop strategy and put in place a remediation project if it is necessary.