General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
January 28, 2019

While speaking at the ISDA Annual Legal Forum in London, Edwin Schooling Latter of FCA discussed "what the final steps in transition away from the London Inter-bank Offered Rate (LIBOR) might look like." He expressed his views in the backdrop of the UK's planned adoption of the Sterling Overnight Index Average (SONIA) as its risk-free rate to replace sterling LIBOR. He also discussed that a fallback LIBOR rate is being worked upon for use in legacy contracts after 2021. He emphasized that the best and smoothest transition from LIBOR will be one in which contracts that reference LIBOR are replaced or amended before fallback provisions are triggered.

Mr Latter highlighted that, last year, the market took a very significant step forward on the fundamentally important task of calculating a fallback rate that could replace LIBOR in outstanding contracts. ISDA took the lead on this, at the request of FSB’s Official Sector Steering Group (OSSG), which is the international forum where authorities from across the globe have coordinated their work on interest rate reform. Through its consultation, ISDA has successfully established a wide consensus across different types of market participants and across jurisdictions, on an appropriate, and appropriately fair, way of calculating a fallback rate that could substitute for sterling, yen, and Swiss franc LIBOR in contracts. This fallback rate relies on the risk-free rates identified for these three currencies (that is, SONIA, TONA and SARON). The ISDA consultation proposals attracted a wide consensus that the term element of LIBOR should be replicated by compounding of the observed overnight rates at the end of the relevant term. There are consultations yet to come on the U.S. dollar LIBOR and with regards to euro LIBOR and Euribor. 

At this point, the requirements of the European Benchmark Regulation become relevant. Among these requirements is a clear and unambiguous requirement for not only the administrator, but also for the supervisor of the benchmark administrator to assess the capability of a critical benchmark to be representative of an underlying market and economic reality. In case of LIBOR, FCA is the supervisor and it is required to make this assessment of "representativeness" each time a supervised contributor—that is, a panel bank—announces that it intends to stop submitting data. Thus, it is entirely plausible that the end-game for LIBOR will include an assessment by FCA that one or more panels have shrunk so significantly in terms of number of banks or the market share of the banks remaining, that it no longer considers the relevant rate capable of being representative. FCA would announce such a view if and when it is reached. Market participants would then need to consider the many potential negative ramifications of using a rate when its regulator had found it not to be reliably representative of the underlying market.

Mr. Latter mentioned that the share of cleared sterling swaps referencing SONIA grew to 19% in the second half of 2018, from 11% in the first half of 2016. Furthermore, with regard to futures, daily trading volume in SONIA futures and SOFR futures, both averaged 15,000 contracts per day in December. He also added that there is now a wide recognition that LIBOR is coming to an end. Thanks to an agreement reached with 20 panel banks to continue submitting until the end of 2021, LIBOR is not expected to cease before that point. However, there is uncertainty on how LIBOR will end. Therefore, FCA urges those still creating new contracts that reference LIBOR, and have a contract life beyond end-2021, to move rapidly to the new risk-free rates whose continued publication beyond that date can be relied on. FCA believes that the smoothest transition to LIBOR will be one in which contracts that reference LIBOR are replaced or amended before fallback provisions are triggered. Market participants should not rely on the availability of an option to use LIBOR for legacy contracts.

 

Related Links

Keywords: Europe, UK, Banking, LIBOR, SONIA, Reference Rates, Interest Rate Benchmarks, FCA

 

Related Articles
News

EBA Single Rulebook Q&A: Fourth Update for March 2019

EBA published answers to five questions under the Single Rulebook question and answer (Q&A) updates for this week.

March 22, 2019 WebPage Regulatory News
News

ECB Updates Validation Checks and List of Identifiers Under AnaCredit

ECB updated the AnaCredit validation checks (Version 1.4) and the list of national identifiers (version 2.4) for AnaCredit reporting.

March 21, 2019 WebPage Regulatory News
News

BCBS Publishes Results of the Basel III Monitoring Exercise

BCBS published results of the Basel III monitoring exercise based on data as of June 30, 2018.

March 20, 2019 WebPage Regulatory News
News

EBA, FCA, and PRA Agree on MoU Template for Supervisory Cooperation

EBA, FCA, and PRA announced that they have agreed on a template for the Memorandum of Understanding (MoU) that sets out the expectations for supervisory cooperation and information-sharing arrangements between UK and EU/European Economic Area national authorities.

March 20, 2019 WebPage Regulatory News
News

HKMA Publishes CoP on Loss-Absorbing Capacity Requirements of Banks

HKMA issued, in relation to the Financial Institutions Resolution (Loss-Absorbing Capacity Requirements—Banking Sector) Rules (LAC Rules) a chapter of a code of practice (LAC CoP) under section 196 of the Financial Institutions Resolution Ordinance (FIRO).

March 20, 2019 WebPage Regulatory News
News

EBA Publishes Reports Monitoring the Implementation of Basel III in EU

EBA published two reports measuring the impact of implementing the final Basel III reforms and monitoring the implementation of liquidity measures in EU.

March 20, 2019 WebPage Regulatory News
News

BCBS Publishes Results of Survey on Proportionality in Bank Regulation

BCBS published a report presenting the results of a survey conducted on proportionality practices in bank regulation and supervision.

March 19, 2019 WebPage Regulatory News
News

US Agencies Adopt Interim Rule to Facilitate Transfers of Legacy Swaps

US Agencies (FCA, FDIC, FED, FHFA, and OCC) are adopting and inviting comments on an interim final rule.

March 19, 2019 WebPage Regulatory News
News

EBA Updates List of Other Systemically Important Institutions in EU

EBA updated the 2018 list of other systemically important institutions (O-SIIs) in EU. The list also reflects the additional capital buffers that the relevant authorities have set for the identified O-SIIs.

March 19, 2019 WebPage Regulatory News
News

HKMA Expects Banks to Manage Risks Related to Crypto-Asset Exposures

HKMA issued a statement announcing that it expects authorized institutions to take note of the BCBS statement on crypto-assets and its prudential expectations.

March 18, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2780