Shearman & Sterling LLP | FinReg | Bank of England Announces LIBOR Initiatives and Publishes Discussion Paper on Risk-Free Rates Transition
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  • Bank of England Announces LIBOR Initiatives and Publishes Discussion Paper on Risk-Free Rates Transition
    02/26/2020
    Andrew Hauser, the Executive Directive of Markets at the Bank of England, today announced the launch of two significant initiatives to boost the U.K.’s transition away from sterling LIBOR. Firstly, the BoE intends to begin publishing a compounded Sterling Overnight Index Average index from July 2020, enabling market participants to construct compounded SONIA rates which can be used as a replacement reference rate for term LIBOR-linked instruments. Secondly, from October 2020, the BoE will progressively increase the haircuts applied to LIBOR-linked collateral placed with the BoE as security against central bank loans, with a final haircut of 100% by the end of 2021. From that point, LIBOR-linked instruments will effectively no longer constitute eligible collateral. Any LIBOR-linked instruments issued after October 2020 will also be ineligible for use at the BoE. This reflects the target that has been set for market participants to cease issuing new LIBOR-linked instruments by Q3 2020. In his speech, Mr. Hauser also praised the progress made by the International Swaps and Derivatives Association in establishing consensus on fallback provisions for LIBOR cessation.

    In conjunction with the announcements, the BoE has also published a Discussion Paper seeking input on the BoE’s publication of the daily SONIA compounded index (referred to in Mr. Hauser’s speech), as well as a proposed set of compounded SONIA period averages. The daily compounded index would represent the return on an investment earning daily interest at the SONIA rate; market participants could calculate the interest payable on their instruments by reference to the change in the index between two dates. Subject to feedback, the BoE intends to announce a precise date for the projected July 2020 publication of the index in Q2 2020. The SONIA period averages would provide interest rates for set periods (e.g., one, three and six months) that could be directly referenced in contracts. The BoE is seeking feedback on the usefulness of these averages, given that they will not always reflect the same time periods as currently used in SONIA-referencing products, and on preferred conventions for calculating them. Responses to the paper should be submitted by April 9, 2020.

    View Andrew Hauser's speech.

    View the Bank of England's Discussion Paper

    View details of ISDA’s LIBOR fallbacks.

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