Minutes of the Working Group on Sterling Risk-Free Reference Rates – June 2021

Agenda

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

4 Derivatives

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

7 AOB

Minutes

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. Derivatives

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.

Attendees

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