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1 Standing Items
a – Welcome
b – Competition law reminder
c – Minutes from the May meeting
d – Recent publications
2 Update from HM Treasury
3 Update from the FCA
a – Market update
b – ‘SONIA first’ for exchange traded derivatives
c – SOFR liquidity
d – Transition in cross-currency derivatives
5 Bond market
6 Loan market
1. Standing Items
1. The Chair welcomed attendees and the Working Group’s competition law counsel reminded members of their responsibilities under competition law.
2. The Working Group published an update to its roadmap to include FCA consultations and the ‘SONIA first’ initiative for exchange traded derivatives. The Q&A relating to the recommended end-Q1 2021 milestone to cease initiation of new sterling LIBOR linked lending and the associated best practice document for the loan market were updated to cover existing facilities with extension options and secondary market cost of carry calculations respectively.
2. HM Treasury
3. Representatives from Her Majesty’s Treasury (HMT) joined the meeting.
4. HMT ran a consultation earlier this year to consider the need for further legislation to reduce the scope for uncertainty around use of synthetic LIBOR. They have since announced that they will bring forward legislation to address this risk, subject to parliamentary constraints.
5. This draft legislation is being finalised and is intended to provide legal certainty that synthetic LIBOR is a continuation of LIBOR, providing contractual continuity.
6. The FCA noted that using a term SONIA reference rate or compounded in arrears SONIA plus a fixed spread has the same expected value as sterling LIBOR would have had from the end of 2021. Being based on compounded in arrears SONIA has the additional advantages of referencing the most robust possible foundational benchmark, both in terms of individual contracts, and in terms of the wider financial system. This is in line with items on the FCA website and speeches. There is also wide international consensus on how the fixed spreads could be calculated.
7. When published, the draft legislation will be accompanied by an explanatory text to explain its effect, as is standard practice.
3. Update from FCA
8. The FCA intended to consult on what a potential synthetic LIBOR looks like and referred to its previous public statements where it had signalled that a potential synthetic LIBOR was likely to be a term risk-free rate plus the ISDA spread.
9. The FCA had a consultation open until 17 June on, amongst other things, the framework for allowing use of any synthetic LIBOR. The FCA would analyse the responses and then set out precisely how it intends to allow use of synthetic LIBOR in a further consultation before a final decision, provisionally around October 2021.
10. Contracts that are actively converted but retain the last interest rate reset before end-2021 being based on LIBOR, before automatically moving to alternative rates thereafter, are consistent with the FCA’s expectations. The Working Group’s recommended end-Q3 milestone to complete active transition, where possible, intends to avoid an end of year rush for resource to support transition of GBP Libor linked contracts.
11. The Commodity Futures Trading Commission’s MRAC Sub-committee have announced a ‘SOFR first’ initiative for 26 July. The FCA are keen that the UK is a part of this, particularly on the morning of 26 July when the UK markets will open before those in the US. If there was sufficient support from UK market participants, the FCA and the Bank of England would put out a statement in support of the 26 July initiative.
12. The chair supported this initiative and other similar initiatives for SONIA.
4.a. Market update
13. As of the end of May, SONIA had a 70% market share for linear interest rate swaps (vs GBP Libor). This includes forward rate agreements and LIBOR compression trades so the 70% market share of SONIA was likely understated. The dealer-to-dealer market was almost entirely SONIA based with only basis swaps still referencing LIBOR.
14. The ‘SONIA first’ switch for non-linear derivatives occurred successfully on 11 May. The FCA believed that the dealer-to-dealer market was now almost exclusively versus SONIA. For all new business, including dealer-to-client, the share was 50% versus SONIA. Only a handful of LIBOR prices had been shown since 11 May and the non-linear market across all products was moving away from LIBOR.
4.b. ‘SONIA first’ for exchange traded derivatives
15. The ‘SONIA first’ switch for exchange traded derivatives was scheduled for 17 June. The FCA and the Bank of England were engaging with market participants, futures exchanges and the Futures Industry Association ahead of the switch date.
4.c. SOFR liquidity
16. The FCA emphasized the importance of the 26 July date set for the ‘SOFR first’ initiative, and was surveying market participants to determine support to align a switch in trading conventions for US dollar inter-dealer interest rate swaps in UK markets from USD LIBOR to SOFR on the same date.
4.d. Transition in cross-currency derivatives
17. The Bank of England and FCA were exploring the potential for a global ‘RFR first’ for cross-currency derivatives after the SOFR first initiative. This would be later in 2021 to allow time for SOFR liquidity to build after the SOFR first initiative on 26 July and to coordinate across all five LIBOR jurisdictions. Potential timing could be a date in September, after the August summer break, but ahead of the recommended end-Q3 milestone to cease initiation of cross-currency swaps with a GBP LIBOR leg.
5. Bond market
18. The Bond Market Sub-Group continue to encourage consent solicitations of legacy LIBOR bonds. So far 33% of GBP bonds by value have been converted. It was acknowledged that the percent of total bonds issued would be lower than that given a long tail of smaller issuance.
6. Loan market
19. The Loan Enablers Task Force was looking to address areas that require more clarity particularly those of market-wide concern.
20. The Loan Market Association have produced documentation for loans that have been converted to risk-free rates and is in the process of drafting guidance for the remaining documents not amended.
Private sector attendees
Tushar Morzaria – Barclays (Chair)
Paul Mansour – Barclays (Chair’s Office)
Andreas Giannopoulos – Barclays (Chair’s Office)
Helen Robinson – Barclays (Chair’s Office)
Joseph McQuade – Barclays (Chair’s Office)
Shaun Kennedy – AB Ports
Alan Coutts – Aberdeen Asset Management
Sarah Boyce – Association of Corporate Treasurers
Alexandre Papadacci – Axa
Katherine Ashdown – Bank of America
Snigdha Singh – Bank of America
Doug Laurie – Barclays
Jonathan Brown – Barclays
Robert Mitchelson – Blackrock
Ryan O’Keeffe – Blackrock
Greg Olsen – Clifford Chance (Competition Law Counsel)
Zsolt Szollosi – Credit Suisse
Michael Barron – Deutsche Bank
Simon Goodwin – Deutsche Bank
Axel van Nederveen – EBRD
Alan Farrell – Goldman Sachs
Chirag Dave – Goldman Sachs
John Sullivan – HSBC
Tom Duggan – HMT – Guest (item 2 only)
Merlin Veron – HMT – Guest (item 2 only)
Sebastian Astin-Chamberlain – HMT – Guest (item 2 only)
Catherine Braganza – HMT – Guest (item 2 only)
Matthew Horton – ICE Futures Europe
Paul Richards – ICMA
Robert Gall – Insight Investment
Galina Dimitrova – Investment Association
Rick Sandilands – ISDA
Scott O’Malia – ISDA
Kari Hallgrimsson – JP Morgan
Guy Whitby-Smith – Legal & General Investment Management
Ian Fox – Lloyds Banking Group
Clare Dawson – Loan Market Association
Philip Whitehurst – LCH
Siobhan Clarke – M&G
Katarzyna Abendan – M&G
Terry Barton – Nationwide
Bob Goodfellow – NatWest Markets
Phil Lloyd – NatWest Markets
Jamieson Thrower – NatWest Markets
Donal Quaid – NatWest Markets
Frances Hinden – Shell
Hannah Falth – UBS
Daniel Cichocki – UK Finance
Stephen Pegge – UK Finance
Official sector attendees
Alastair Hughes – Bank of England
Arif Merali – Bank of England
Tom Horn – Bank of England
Nicole Stirk – Bank of England
Peter Balint – Bank of England
Stefania Spiga – Bank of England
Leman Menguturk – Bank of England
Edwin Schooling Latter – Financial Conduct Authority
Helen Boyd – Financial Conduct Authority
Anne-Laure Condat – Financial Conduct Authority
Toby Williams – Financial Conduct Authority
Will Davies – Financial Conduct Authority