The following posts provide a snapshot of selected UK, EU and global wholesale financial regulatory developments of interest to banks, investment firms, broker-dealers, market infrastructures, asset managers and corporates.
LIBOR Transition: Further Proposed Changes to EU Clearing and Derivatives Trading Obligations
The European Securities and Markets Authority has opened a consultation on proposals to amend the EU clearing and trading derivative obligations to reflect recent benchmark transitions from LIBOR to so-called risk-free rates. The scope of the EU derivatives clearing and trading obligations for interest rate derivatives based on LIBOR denominated in EUR, GBP, JPY and USD were amended earlier this year. Amendments to the Regulatory Technical Standards, which took effect on May 18, 2022, removed interest rate derivative classes referencing GBP and USD LIBOR from the clearing and trading obligations, removed IRD classes referencing EONIA and JPY LIBOR from the clearing obligation, and introduced a clearing obligation for IRD classes referencing three new risk-free rates, namely €STR, SONIA and SOFR.
ESMA is proposing to further amend the RTS to:
- introduce a clearing obligation for overnight index swaps referencing TONA (JPY);
- expand the maturities in scope of the clearing obligation for OTC interest rate swaps referencing SOFR (USD); and
- introduce a derivatives trading obligation for certain classes of OTC interest rate swaps referencing €STR (EUR).
Responses to the consultation may be submitted by September 30, 2022. ESMA will consider the feedback before submitting for approval by the European Commission final draft amending RTS.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : Derivatives, LIBOR Transition
UK Conduct Regulator's Rules for Use of Synthetic Sterling and Yen LIBOR Enter Into Force
The U.K. Financial Conduct Authority's new rules permitting legacy use of certain synthetic sterling and yen LIBOR settings enter into force today. The FCA has published its final notice confirming that ICE Benchmark Administration will publish synthetic 1-month, 3-month and 6-month sterling and Japanese yen LIBOR rates until the end of 2022. These synthetic rates will not be representative of the market or economic reality previously measured by the benchmark. No substantive changes have been made to the draft version of the FCA's notice, which was published in November 2021. The synthetic rates will be permitted to be used for legacy LIBOR-referencing contracts, other than cleared derivatives, that have not been changed or updated ahead of December 31, 2021. They may not be used by U.K.-supervised entities in new regulated financial contracts, instruments and/or investment fund performance measurement.
The FCA has also published a notice to ICE Benchmark Administration confirming the methodology to be adopted in calculating the synthetic rates.ATTORNEYS: Chloe Barrowman, Thomas Donegan
TOPIC : LIBOR Transition
European Securities and Markets Authority Provides Regulatory Forbearance for EU Clearing and Derivatives Trading Obligations in Support of LIBOR Transition
The European Securities and Markets Authority has issued a statement in which it states that EU national regulators should not, from January 3, 2022, prioritize supervisory action for any failures by firms to comply with the mandatory clearing obligation under the European Market Infrastructure Regulation, for interest rate derivatives referencing EONIA, GBP LIBOR, JPY LIBOR or USD LIBOR and the derivatives trading obligation for IRD classes referencing GBP LIBOR or USD LIBOR. On November 18, 2021, ESMA submitted final draft Regulatory Technical Standards to amend the EU clearing and trading derivative obligations in support of the benchmark transition to risk-free rates. However, ESMA is aware of the time that the approval process may take and therefore considers that regulatory forbearance is appropriate.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : Derivatives, Financial Market Infrastructure, LIBOR Transition
European Securities and Markets Authority Publishes Proposed EU Clearing and Derivatives Trading Obligations Changes for LIBOR Transition
The European Securities and Markets Authority has published a final report and final draft Regulatory Technical Standards to amend the EU clearing and trading derivative obligations for the benchmark transition to risk-free rates. To support the transition away from EONIA and LIBOR to risk-free rates such as €STR, ESMA is proposing to amend the scope of the derivatives clearing and trading obligations for interest rate derivatives denominated in EUR, GBP, JPY and USD. In particular, ESMA is proposing to:
- Remove IRD classes referencing GBP and USD LIBOR from the clearing and trading obligations.
- Remove IRD classes referencing EONIA and JPY LIBOR from the clearing obligation.
- Introduce a clearing obligation for IRD classes referencing €STR, SONIA and SOFR.
The draft RTS have been submitted to the European Commission for endorsement.ATTORNEYS: Thomas Donegan, Sandy Collins
TOPICS : Derivatives, Financial Market Infrastructure, LIBOR Transition
UK Regulator Confirms Legacy Use of Synthetic LIBOR
The U.K. Financial Conduct Authority has confirmed that the use of certain synthetic sterling and yen LIBOR settings will be permitted until the end of 2022 for legacy LIBOR-referencing contracts, other than cleared derivatives, that have not been changed or updated ahead of December 31, 2021. The synthetic rates cannot be used in any new contracts.
Read more.ATTORNEYS: Chloe Barrowman, Thomas Donegan
TOPIC : LIBOR Transition
UK Regulator Amends Derivatives Trading Obligation for LIBOR Transition Purposes
Following its July 2021 consultation, the U.K. Financial Conduct Authority has published a Policy Statement amending the list of derivatives subject to the U.K. trading obligation for the purposes of the LIBOR transition.
The derivatives trading obligation under the U.K. version of the Markets in Financial Instruments Regulation requires U.K. investment firms to conclude transactions in certain derivatives on U.K. regulated markets, multilateral trading facilities, organised trading facilities or third-country venues in jurisdictions benefiting from U.K. equivalence decisions. In the absence of any equivalence decision, the FCA used its Temporary Transitional Power to provide transitional relief from December 31, 2020 (the end of the transition period) until March 31, 2022 for U.K. firms, EU firms using the U.K.'s temporary permissions regime and U.K. branches of overseas firms. The trading obligation currently applies to certain fixed-to-float interest rate swaps denominated in EUR, USD and GBP, and to certain index credit default swaps (iTraxx Europe Main and iTraxx Europe Crossover).
Read more.ATTORNEYS: Thomas Donegan, Kristina Killick, Sandy Collins
TOPICS : Derivatives, LIBOR Transition, MiFID II
Bank of England Proposes Introducing Clearing Obligation for TONA Overnight Index Swaps
The Bank of England has launched a consultation proposing to subject Overnight Index Swaps (OIS) that reference the Tokyo Overnight Average rate (TONA) to the U.K. derivatives clearing obligation under the U.K. version of the European Market Infrastructure Regulation. The BoE has already decided to remove contracts referencing JPY LIBOR from the clearing obligation starting December 6, 2021. Following recent announcements made by the Japanese authorities, the BoE now considers it appropriate to replace contracts referencing JPY LIBOR with contracts referencing TONA. The planned change would apply from December 6, 2021 or shortly thereafter. Responses to the consultation may be submitted until October 27, 2021.
Read more.ATTORNEYS: Sandy Collins, Thomas Donegan
TOPICS : Derivatives, LIBOR Transition
Bank of England Confirms Changes to Derivatives Clearing Obligation to Reflect Benchmark Reforms
The Bank of England has published a Policy Statement and final changes to the contracts subject to the derivatives clearing obligation under the U.K. version of the European Market Infrastructure Regulation. The U.K. onshored European Market Infrastructure Regulation imposes a clearing obligation on U.K. firms that are counterparties to certain OTC derivatives contracts. The clearing obligation applies to Interest Rate Swaps denominated in seven currencies (EUR, GBP, JPY, USD, NOK, PLN and SEK) and to two classes of credit default swap indices (iTraxx Europe Main and iTraxx Europe Crossover). The details are set out in three sets of Binding Technical Standards—Commission Delegated Regulation (EU) 2015/2205, Commission Delegated Regulation (EU) 2016/592 and Commission Delegated Regulation (EU) 2016/1178.
Read more.ATTORNEYS: Sandy Collins, Thomas Donegan
TOPICS : Derivatives, LIBOR Transition
UK Financial Services Act 2021 Published
The U.K. Financial Services Bill has received Royal Assent from Her Majesty the Queen and has become an Act of Parliament, the Financial Services Act 2021. Some provisions of the Act came into force on the date of Royal Assent, with a limited number following on June 29, 2021. The majority of the Act will come into force on a date specified in regulations yet to be made by HM Treasury.
LIBOR Panel Bank Submission Cessation Dates Confirmed03/05/2021
The U.K. Financial Conduct Authority has announced the dates for future cessation and unrepresentativeness for all LIBOR settings. The FCA's statement follows its confirmation in November 2017 that the 20 panel banks for the LIBOR benchmark had agreed to support LIBOR until at least the end of 2021 and the regulator's position that the future of LIBOR could not be guaranteed because the underlying markets (the markets for unsecured wholesale term lending to banks) are no longer sufficiently active.
UK Benchmark Regulator Publishes Policy on Exercising New Powers Under the Financial Services Bill
The U.K. Financial Conduct Authority has published Statements of Policy for exercising its new benchmark powers that are being introduced into U.K. law under the Financial Services Bill. Among other things, the Financial Services Bill includes potential enhanced powers for the FCA to wind-down a critical benchmark and deal with tough legacy contracts. The increased powers are being introduced in response to concerns and uncertainty about liability issues for industry participants related to the transition from LIBOR to risk free rates by the end of 2021. The FCA has also announced today the dates for future cessation and unrepresentativeness for all LIBOR settings.
UK Working Group on Sterling Risk-Free Reference Rates Publishes Paper on Ending New Use of GBP LIBOR-Linked Derivatives
The U.K. Working Group on Sterling Risk-Free Reference Rates has published a paper on how market participants can meet the Working Group's intended deadlines for cessation of GBP LIBOR in derivatives.
UK Government Consults on Legal Safe Harbor for Legacy Contracts to Support the Wind-Down of a Critical Benchmark
HM Treasury has opened a consultation on supporting the wind-down of critical benchmarks. The Financial Services Bill includes potential enhanced powers for the Financial Conduct Authority to wind-down a critical benchmark and deal with tough legacy contracts. The increased powers are being introduced in response to concerns and uncertainty about the transition from LIBOR to risk free rates by the end of 2021. The Financial Services Bill includes provisions granting the FCA the power to designate a critical benchmark (such as LIBOR) as an "Article 23A" benchmark if its representativeness is lost or at risk, unless representativeness can reasonably be restored and maintained and there are good reasons to do so. This designation would mean that use of the benchmark by supervised entities in relation to particular types of contracts would be prohibited, subject to certain exemptions.
EU Amends Rules to Address LIBOR Cessation and Extends Use of Third-Country Benchmarks to 2023
The Council of the European Union has announced that it has adopted the final text of the regulation to address LIBOR cessation, which will amend the EU Benchmark Regulation. According to the Council, the amending Regulation will be published in the Official Journal of the European Union on February 12, 2021 and it will enter into force and apply from February 13, 2021.
The EU Benchmark Regulation sets out the authorization and registration requirements for benchmark administrators, including third-country entities, and the requirements for governance and control of administrators. It provides for different categories of benchmarks depending on the risks involved, imposes additional requirements on benchmarks considered to be "critical" and gives powers to national regulators to mandate, under certain conditions, contributions to or the administration of critical benchmarks.
European Central Bank Consults on EURIBOR Fallbacks
The European Central Bank has published two consultation papers on fallback trigger events and fallback rates for EURIBOR. Responses to the consultations should be submitted by January 15, 2021.
Financial Stability Board 2020 Progress Report on Benchmark Reform
The Financial Stability Board has published a 2020 progress report on Reforming Major Interest Rate Benchmarks.
UK Benchmark Regulator Consults on Exercise of New Powers under the Financial Services Bill
The U.K. Financial Conduct Authority has launched a consultation on its proposed policy for exercising the new benchmark powers that are being introduced into U.K. law under the Financial Services Bill. Among other things, the Financial Services Bill includes potential enhanced powers for the FCA to wind-down a critical benchmark and deal with tough legacy contracts. The increased powers are being introduced in response to concerns and uncertainty about the transition from LIBOR to risk free rates by the end of 2021. Responses to the consultations may be submitted until January 18, 2021.
ISDA Launches IBOR Fallbacks Protocol
The Internationals Swaps and Derivatives Association has launched its IBOR Fallbacks Supplement to the 2006 ISDA Definitions and 2020 IBOR Fallbacks Protocol. Both will become effective on January 25, 2021. The fallbacks provide alternative risk free rates to be used in place of discontinued or non-representative IBORs referenced in derivative contracts.
UK Parliament Publishes Financial Services Bill for Post-Brexit Regulatory Framework
The U.K. Government has published a Financial Services Bill setting out a proposed regulatory framework for the financial services industry following the U.K.'s exit from the EU. The Bill is part of the U.K.'s wider initiative under the Future Regulatory Framework Review to re-frame its regulatory framework. Although Brexit has brought challenges to the financial sector, there may also be post-Brexit opportunities for the U.K. to seize. The aim of these reforms is to cement the U.K.'s position as a global financial centre of excellence. A core piece of that will be to set conditions that continue attracting business to the U.K. and to look for opportunities to cut "red tape" whilst at the same time maintaining the U.K.'s globally recognized high regulatory standards.
Financial Stability Board Publishes Global Transition Roadmap for LIBOR
The Financial Stability Board has published a roadmap setting out a target timeline for firm's transition away from LIBOR benchmarks. The roadmap is aimed at financial and non-financial firms to ensure a successful transition away from LIBOR by the end of 2021.
ISDA Announces Upcoming Launch of IBOR Fallbacks Protocol
The International Swaps and Derivatives Association has announced that it will launch its IBOR Fallbacks Supplement to the 2006 ISDA Definitions and its 2020 IBOR Fallbacks Protocol on October 23, 2020, although they will not take effect until January 25, 2021. The Supplement and Protocol implement fallbacks for derivatives contracts that reference discontinued or non-representative IBORs.
International Swaps and Derivatives Association Letter on Timing of ISDA IBOR Fallbacks Protocol
The International Swaps and Derivatives Association has written to the Co-Chairs of the Financial Stability Board Official Sector Steering Group seeking input on its proposed timing for the launch of its IBOR Fallbacks Protocol and IBOR Fallbacks Supplement. The Protocol and Supplement will implement fallbacks for derivatives contracts that reference discontinued or non-representative IBORs. The launch of the Protocol and Supplement is subject to approvals from various international competition authorities, which are still pending. Once the approvals have been obtained, ISDA intends to provide market participants with roughly two weeks' notice of the launch and effective dates of the Protocol and Supplement, allowing market participants to adhere to the Protocol 'in escrow' prior to its launch date. ISDA expects the effective dates of the Protocol and Supplement to occur approximately three months after the launch date, and in any case not before the second half of January 2021.
View ISDA's letter.
UK LIBOR Working Group Publishes Recommendations on SONIA Conventions for the Sterling Loan Market
The U.K.'s Working Group on Sterling Risk-Free Reference Rates has published a set of non-binding Recommendations on the conventions that market participants may wish to adopt to support their use of the Sterling Overnight Index Average as a replacement for LIBOR in sterling bilateral and syndicated loan facilities.
European Central Bank Consults on Compounded €STR Rates
The European Central Bank has launched a consultation on proposals to publish compounded term rates based on the euro short-term rate (€STR). The consultation closes on September 11, 2020. The ECB is requesting feedback on specific characteristics of the compounded rate using €STR. Publication would take place on a daily basis shortly after the €STR publication. Published maturities could range from one week up to one year. A daily index, making it possible to compute compounded rates over non-standard periods, is also envisaged.
View the ECB's consultation paper on compounded term rates based on €STR.
European Central Bank Published Good Practice Guidance on Preparation for Benchmark Rate Reforms
The European Central Bank has published a report on the results of its industry-wide assessment of Eurozone banks’ readiness for the benchmark interest rate reforms, which affect both EONIA and EURIBOR in the euro area. The purpose of the report is to share good practices that the ECB has identified in its horizontal assessment of the preparedness of Eurozone banks supervised under the Single Supervisory Mechanism. According to the ECB, banks need to improve their preparation for the reforms and escalate their implementation of risk mitigation measures.
Financial Stability Board Makes Recommendations to Support LIBOR Transition
The Financial Stability Board and Basel Committee on Banking Supervision have published a report to the G20 on supervisory issues associated with benchmark transition. The report focuses on the transition away from using LIBOR, but is relevant to other Interbank Offered Rates. The report presents the findings of a survey on the status of the move from using LIBOR, whose usage U.K. regulators are attempting to cease from the end of 2021, and sets out recommendations for relevant authorities and supervisors.
UK Resolution Authority Provides Clarity on Impact of LIBOR Transition on Bail-In and Stays Clauses
Following the letter published on December 18, 2019, to the Chair of the Working Group on Sterling Risk-Free Reference Rates, which provided clarification on the impact that the LIBOR transition is likely to have on the prudential requirements for banks, the Prudential Regulation Authority has published a statement providing clarity on the implications of LIBOR transition for contracts in scope of the PRA’s rules on Contractual Recognition of Bail-In and Stay in Resolution. The PRA states that, where the sole purpose of an amendment to a liability or a financial arrangement is to cease using LIBOR, the amendment should not be considered a material amendment under the PRA rules.
Read more.TOPICS : LIBOR Transition, Recovery & Resolution
Financial Stability Board Statement on COVID-19 Impact on Benchmark Reform
The Financial Stability Board has published a statement on the impact of COVID-19 on global benchmark reforms. Although the FSB acknowledges some aspects of benchmark reform will be delayed due to the effects of COVID-19, many areas can go on as planned and the FSB considers that firms should continue to make wider use of risk-free rates to reduce reliance on IBORs. Firms should also ensure their transition programs facilitate a transition away from LIBOR before the end of 2021. The FSB will publish a report on the remaining challenges for benchmark transition later in July.
View the FSB's statement on the impact of COVID-19 on LIBOR benchmark reform.
EU Working Group on Risk-Free Rates Publishes Recommendation on Voluntary Compensation for Swaptions
The EU Working Group on Risk-Free Rates has published its recommendation on voluntary compensation for swaptions affected by the CCP discounting transition from EONIA to €STR. The recommendation follows the Working Group’s March 2020 consultation on the topic. The Working Group recommends that counterparties exchange voluntary compensation for relevant legacy swaption contracts and that market participants contact their swaption counterparties promptly to determine whether compensation is required.
FICC Markets Standards Board Publishes Case Studies for Managing LIBOR Transition Conduct Risks
The FICC Markets Standards Board has published a Spotlight Review on case studies for navigating conduct risks during the LIBOR transition, which is due to be completed by the end of 2021. The Review will be of interest to all market participants, including sell-side, buy-side and corporates. It is intended to assist in the identification and management of conduct risks related to the LIBOR transition. The Review assesses risks to market fairness and effectiveness that could arise during the LIBOR transition and discusses how market participants could tackle these risks. Using practical case studies, the Review draws attention to how uncertainties might lead to decision-making challenges for market participants offering new products to clients or changing performance benchmarks.
The U.K. Financial Conduct Authority published a statement in November 2019 setting out its expectations of firms relating to governance and accountability, replacing LIBOR with alternative rates in existing contracts, offering new products with alternative rates, communicating with customers about the transition from LIBOR and best practice for firms investing on behalf of clients.
View the FMSB Spotlight Review on case studies for navigating LIBOR transition conduct risks.
View the FCA's statement on conduct risks.
Bank of England Confirms Daily Compounded SONIA Index
Following the discussion paper published on February 26, 2020, the Bank of England has announced that it will begin publishing a daily compounded Sterling Overnight Index. It is expected that this will start in early August, although the BoE will confirm the date in due course. 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. The BoE has decided not to proceed with publishing the proposed SONIA period averages due to lack of industry consensus on the usefulness of such data and the underlying conventions. The BoE will consider producing this data if market participants are able to reach a more united view.
UK Working Group Publishes Paper on Identifying Tough Legacy Issues in the LIBOR Transition
The Working Group on Sterling Risk-Free Reference Rates has published a paper on the identification of tough legacy issues. The paper concerns those instances where a contract cannot be amended to reference a suitable alternative rate to LIBOR or use a robust fallback so that the contract moves to a suitable alternative rate on the occurrence of certain events. The Working Group is advocating for the U.K. Government to consider legislation to address tough legacy exposures in contracts governed by English law that reference LIBOR (in sterling or other LIBOR currencies) that remain in operation when LIBOR is proposed to be phased out at the end of 2021. The recommendation is similar to the proposed solution of the Alternative Reference Rates Committee under New York law. The Group advises that other steps should also be taken, including the methodology for LIBOR being modified by either an administrator or official intervention. The latter option of official intervention is controversial, in that the benchmark administrator and its committees would lose control over how the benchmark operates, yet remain liable to regulators for its operation and face other legal risks resulting from external decisions. In the Group's view, the only path for certainty over contracts is for market participants to proactively transition away from LIBOR before the end of 2021.
The paper also sets out the Working Group's analysis of whether tough legacy issues exist for certain types of contracts, covering derivatives, bonds, mortgages and loans.
View the RFRWG paper on tough legacy issues.
Revised ISDA 2006 Definitions Implementing Pre-Cessation Fallbacks Expected in July 2020
The International Swaps and Derivatives Association has published a summary, prepared by the Brattle group, of the responses to the ISDA 2020 consultation on how to implement pre-cessation fallbacks in derivatives. Pre-cessation triggers would cause LIBOR-based derivative contracts to fall back to an alternative reference rate in the event that the U.K. Financial Conduct Authority deemed LIBOR no longer to be representative. ISDA sought views as to whether provisions should be included in its standard documentation specifying that rate options for LIBOR in USD, GBP, CHF, JPY and EUR all contain fallbacks that would apply upon the earlier of: (i) a permanent cessation trigger; and (ii) a 'non-representativeness' trigger.
The report confirms the preliminary findings, published by ISDA on April 15, 2020. The majority of respondents are in favor of including the pre-cessation fallbacks in ISDA documentation via either an amended version of the ISDA 2006 definitions (for new contracts) or a protocol (for legacy contracts).
In July 2020, ISDA intends to publish the amended 2006 ISDA Definitions to incorporate the fallbacks for new trades. The protocol will be published at the same time. Both the revised Definitions and the new protocol will come into effect before the end of 2020.
View the report.
View ISDA's press release.
UK Working Group Updates LIBOR Expectations in Wake of COVID-19
The U.K. Financial Conduct Authority has announced a series of updates to the Working Group on Sterling Risk-Free Reference Rates’ proposed implementation of LIBOR reforms. In March 2020, the RFRWG published a roadmap for the discontinuation of new sterling LIBOR lending by the end of Q3 2020. The FCA, Bank of England and RFRWG now acknowledge that, in light of the COVID-19 pandemic, it will no longer be feasible to transition away from LIBOR across all sterling LIBOR-linked loans by this proposed deadline.
Bank of England Weighs in on LIBOR Transition with a Mandatory Additional LIBOR Collateral Haircut
The Bank of England has published a market notice on risk management approaches to collateral referencing LIBOR for use in the Sterling Monetary Framework. The market risk notice applies to GBP LIBOR, USD LIBOR, EUR LIBOR, JPY LIBOR and CHF LIBOR. It states that from April 1, 2021, a haircut add-on will be applied to all LIBOR Linked Collateral maturing after December 31, 2021. LIBOR Linked Collateral is LIBOR Linked Loan Portfolios, Collateral Securities where the coupon pays interest calculated by reference to LIBOR, Collateral Securities where embedded swap payments are calculated by reference to LIBOR and Collateral Securities backed by loans where one or more loans in the portfolio is a LIBOR Linked Loan. The add-on will be 10% from April 1, 2021, 40% from September 1, 2021 and 100% from December 31, 2021.
The market notice also stipulates that from April 2021, LIBOR Linked Collateral that matures after December 2021 will be ineligible for use in the Sterling Monetary Framework.
View the market notice.
International Swaps and Derivatives Association Announces Preliminary Results of LIBOR Pre-Cessation Fallbacks Consultation
The International Swaps and Derivatives Association has announced the preliminary results of its consultation on pre-cessation fallbacks for LIBOR-referencing derivatives. The consultation was launched in February 2020, and sought industry responses on ISDA’s proposals to add a pre-cessation trigger to the LIBOR cessation fallbacks ISDA is proposing to implement in its standard documentation. The trigger would cause LIBOR-based derivative contracts to fall back to an alternative reference rate in the event that the U.K. Financial Conduct Authority deemed LIBOR to be no longer representative.
Financial Stability Board Writes to G20 on COVID-19 Response
The Financial Stability Board has published a letter from Randal K. Quarles, the FSB Chair, to G20 Finance Ministers and Central Bank Governors on the response to the coronavirus pandemic. The letter highlights that the financial sector needs to respond to a "twin challenge": the increased demand for credit throughout the global economy and the uncertainty around the value of assets. The letter describes how the FSB and its member jurisdictions have responded to the pandemic to support local and global market functioning, discussing in particular, the steps taken to maintaining financial stability and supporting the real economy during the COVID-19 crisis. The letter also outlines the work to promote a global financial system that supports a strong recovery, including the FSB's prioritizing of certain areas, namely non-bank financial intermediation, the orderly transition away from LIBOR, utilizing technological innovation to assist in cybersecurity and promoting efficient and resilient cross-border payments.
View the FSB's letter.
Details of other regulatory responses to COVID-19 are available on our COVID-19 Research Center.TOPICS : COVID-19, LIBOR Transition, Payment Services
UK Conduct Regulator: COVID-19 Will Not Impact LIBOR Deadline
On March 25, 2020, the U.K. Financial Conduct Authority confirmed that COVID-19 is not expected to affect LIBOR preparations and the target date for LIBOR cessation of the end of 2021 still stands. The FCA does acknowledge, however, that some interim LIBOR milestones may not be met as a result of the pandemic, and it will continue to monitor the impact on such timelines carefully.
View the FCA's statement on COVID-19 and LIBOR.
Details of other regulatory responses to COVID-19 are available at our COVID-19 Research Center.
EU Working Group on Risk-Free Rates Consults on Voluntary Compensation for Legacy Swaptions
The EU Working Group on Risk-Free Rates has launched a consultation on a proposed recommendation for voluntary compensation for legacy swaptions impacted by the CCP discounting transition to Euro Short-Term Rate (€STR). A Swaption is a type of interest-rate derivative contract. The CCP discounting switch from EONIA to €STR is planned for June 2020. The Working Group has identified that if the exercise date of swaptions is after the CCP transition date, the valuation of the products may change because of the discounting switch from EONIA to €STR. However, because the contracts are bilateral, the CCP compensation mechanism will not apply. The Working Group is seeking feedback on whether it should issue recommendations on the voluntary exchange of a cash compensation between bilateral counterparties to swaption contracts.
The consultation closes on April 3, 2020.
View the consultation paper.
Working Group on Sterling Risk-Free Reference Rates Publishes Roadmap for Ceasing New GBP LIBOR Lending by Q4 2020
The Working Group on Sterling Risk-Free Reference Rates has published two documents relevant to the transition away from the use of LIBOR. The first is a statement on bond market conventions and the second is a path for discontinuation of new GBP LIBOR lending by the end of Q3 2020.
Bank of England Announces LIBOR Initiatives and Publishes Discussion Paper on Risk-Free Rates Transition
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.
Read more.TOPICS : LIBOR Transition, Securities
International Swaps and Derivatives Association Announces Results of LIBOR Fallbacks Consultation and New Pre-Cessation Fallbacks Consultation
The International Swaps and Derivatives Association has published the results of its consultation on fallbacks to be introduced into standard ISDA documentation based on alternative risk-free rates for EUR LIBOR and EURIBOR. The fallbacks would apply if the relevant IBOR were to be permanently discontinued. Respondents to the consultation agreed with ISDA’s proposed approach of adopting a compounded setting in arrears rate with a backward-shift adjustment and historical median over a five-year lookback period approach to address technical issues associated with the fallback rates. ISDA therefore intends to develop fallback provisions on this basis. It will publish an anonymized summary of the consultation feedback in the coming weeks.
EU Working Group on Risk-Free Rates Publishes Report on Liquidity in EONIA transition
The EU Working Group on Risk-Free Rates has published a report setting out recommendations for the transition of financial products from EONIA to the Euro Short-Term Rate (€STR). The recommendations aim to ensure liquidity in €STR cash and derivatives products and include practical recommendations, such as replacing EONIA with €STR products at the earliest opportunity and communicating with customers and other market participants about the transition.
Financial Stability Board Highlights Vulnerabilities in Global Financial System
The Financial Stability Board has written to G20 Finance Ministers and Central Bank Governors outlining the key focus areas for the FSB’s work ahead of the next G20 summit in Saudi Arabia in November 2020. The communication builds on certain areas highlighted as priorities in the FSB’s 2020 Work Program, published in December 2019.
Further Consultation on Pre-Cessation Fallbacks Announced
The International Swaps and Derivatives Association has announced that it will be issuing later in February 2020 a further consultation on how to implement pre-cessation fallbacks. A “pre-cessation” trigger in derivative contracts would cause LIBOR-based contracts to fall back to an alternative reference rate in the event that the U.K. Financial Conduct Authority deemed LIBOR no longer to be representative.
UK Regulator Outlines Priorities for Supervising Benchmark Administrators
The U.K. Financial Conduct Authority has written to the CEOs of benchmark administrators that it supervises. In the letter, the FCA sets out its supervisory strategy as well as the potential harms that benchmark administrators pose to their customers and to the financial markets. The FCA is asking all benchmark administrators to consider the harm that their firm may present and to consider how those could be mitigated. The FCA intends to focus over the next two years on the following areas to ensure that its supervision of benchmark administrators mitigates the identified risks:
- Quality of standards: the quality of an administrator's governance and controls, the information provided in their Benchmark Statement, their recalculation and cessation policies, their outsourcing arrangements and their approach to operational resilience; and
- Excessive fees and costs: the FCA is concerned that competition may not be working well in the provision of benchmarks following the feedback received to its Wholesale Sector Competition Review and Asset Management Market Study. The FCA intends to carry out a Call for Input on access to data in wholesale markets so that it can gain a better understanding of the issues and determine whether any action is needed.
UK Conduct Regulator Wants Asset Management Sector to Reflect on Risks to Customers and Markets
The U.K. Financial Conduct Authority has published two letters addressed to the CEOs of firms in the asset management and funds sectors. The first letter is addressed to CEOs of FCA-authorized firms directly managing mainstream investment vehicles or advising on mainstream investments, excluding wealth managers and financial advisers. The second letter is addressed to CEOs of FCA-authorized firms managing alternative investment vehicles, such as hedge funds or private equity funds, or managing alternative assets directly or advising on these types of investments. The letters follow the FCA's report on its review of how firms in the asset management sector selected and used risk modeling and other portfolio management tools.
Read more.TOPICS : Corporate Governance, Funds, LIBOR Transition, MiFID II
UK Conduct Regulator Clarifies Rules on Publication of Non-Representative LIBOR
The U.K. Financial Conduct Authority has responded to a request from the International Swaps and Derivatives Association for clarification on the expected timeframes for publication of a non-representative LIBOR. The FCA (in conjunction with the Financial Stability Board) had previously requested ISDA to introduce “pre-cessation” triggers in its derivative contracts, causing LIBOR-based contracts to fall back to an alternative reference rate in the event that the FCA deemed LIBOR to no longer be representative. ISDA requested clarity about the length of the period during which such a non-representative LIBOR might be published prior to its total cessation.
International Swaps and Derivatives Association Consults on Fallbacks Based on Alternative Risk-Free Rates For Derivatives Referencing EUR Libor and EURIBOR
The International Swaps and Derivatives Association has launched a consultation in which it proposes to amend its standard documentation to implement fallbacks based on alternative risk-free rates for certain key Interbank Offered Rates - EUR LIBOR and EURIBOR. ISDA states that the back-ups will apply if the relevant IBOR is permanently discontinued, based on defined triggers. Responses to the consultation should be submitted to ISDA by January 21, 2020.
UK Prudential Regulatory Authority Responds on Prudential Impediments for Banks Arising from the LIBOR Transition
The Prudential Regulation Authority has published a letter addressed to the Chair of the Working Group on Sterling Risk-Free Reference Rates. The letter responds to the Working Group's letter in October 2019 requesting regulatory forbearance or clarification from regulators on the impact that the LIBOR transition is likely to have on the prudential requirements for banks. The main issues raised by the Working Group include: (i) the potential for certain capital instruments to no longer qualify as regulatory capital; (ii) the potential for securitizations and MREL-eligible instruments to be considered as "new contracts" as a result of changes to contractual terms, leading to the need to insert bail-in or other bank recovery contractual terms; and (iii) that many banks will need to obtain regulatory approvals for alterations to the models used to determine their regulatory capital arising from their exposures and risks.