BoE-FCA and OCC Issue Statements on LIBOR Transition
In a recent statement, BoE and FCA supported and encouraged liquidity providers in the USD linear interest rate swaps market to adopt new trading conventions for interdealer trading based on Secured Overnight Financing Rate (SOFR), instead of on London Interbank Offered Rate (LIBOR), from July 26, 2021. This is to facilitate a shift in the market liquidity toward SOFR, bringing benefits for a wide range of users as they move away from LIBOR.
The proposed change will involve interdealer brokers moving the primary basis of their pricing screens and curve construction for interest rate swaps from USD LIBOR to SOFR. At present, SOFR swaps are priced by default in reference to a LIBOR swap adjusted by the LIBOR-SOFR basis. As a result of this change, SOFR swaps would be the primary pricing point. LIBOR swaps would, therefore, be priced by reference to SOFR swaps adjusted by the LIBOR-SOFR basis. The same change would be made in the trading of swap spreads (swaps against bonds) in USD markets, such that the default pricing will show SOFR swaps relative to US Treasuries. For the avoidance of doubt, from July 26, 2021, FCA and BoE encourage all trading in USD LIBOR swaps, and USD LIBOR-based swap spreads in the interdealer broker market to be replaced with trading in SOFR swaps and SOFR-based swap spreads. USD LIBOR is expected to be accessible only as a basis swap to SOFR in the interdealer broker market from this date. However screens for outright LIBOR swaps and LIBOR-based swap spreads are expected to remain available for informational purposes, but not trading activity, until October 22, 2021.
Additionally, as per a recent statement form the US regulatory agency OCC, every bank, regardless of size, is expected to demonstrate that its replacement rate selections are appropriate for the bank’s products, funding needs, and operational capacities. The statement noted the importance of banks considering the strength of the fallback provisions they employ and noted that it is imperative that banks continue careful planning for the LIBOR transition. OCC examiners will continue to work with banks to ensure their full preparedness.
Related Links
Keywords: Europe, Americas, UK, US, Banking, Securities, LIBOR, SOFR, Benchmark Reforms, Interest Rate Benchmarks, LIBOR Transition, OCC, FCA, BoE
Previous Article
BIS and Nordic Central Banks Launch Innovation Hub in StockholmRelated Articles
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
EC Mandates ESAs to Propose Amendments to SFDR Technical Standards
The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.
EBA Examines Supervisory Practices, Issues Deposits Reporting Template
The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),
SNB Updates NSFR Forms and FINMA Consults on Operational Risk Circular
The Swiss National Bank (SNB) published Version 1.2 of the reporting forms (NSFR_G and NSFR_P) on the net stable funding ratio (NSFR) of banks, along with the associated documentation.
US Agency Publications Address Basel, Reporting, and CECL Developments
The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances