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.
Keywords: Europe, Americas, UK, US, Banking, Securities, LIBOR, SOFR, Benchmark Reforms, Interest Rate Benchmarks, LIBOR Transition, OCC, FCA, BoE
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