June 27, 2019

BoE published a discussion paper that seeks initial feedback on the BoE approach to the risk management of collateral that references the London Interbank Offered Rate (LIBOR); this approach is positioned at BoE for use in its market operations, as sterling and other markets transition away from LIBOR toward the alternative risk‐free reference rates. Comments are requested by September 27, 2019.

The paper provides a brief background to both the LIBOR transition process and the collateral framework of BoE and describes their potential implications for the BoE balance sheet from LIBOR transition. In the UK, BoE and FCA are working with market participants through the Working Group on Sterling Risk‐Free Reference Rates to catalyze a transition to using the Sterling Overnight Index Average (SONIA) as the primary interest rate benchmark in sterling markets. Against this backdrop, BoE has initiated a review of its own exposures, or potential exposures, to LIBOR. One key area of investigation has been the collateral that banks and other financial firms are asked to provide when borrowing from BoE under the Sterling Monetary Framework.

The paper also outlines a number of possible risk management approaches that are under consideration by BoE to ensure that it remains well-placed to provide liquidity insurance in support of financial stability. It further poses some questions for discussion. Views on these questions are sought, both from firms that are signed up (or expect to sign up) to the Sterling Monetary Framework and from any other interested parties. Responses will be used to help frame the future risk management approach of BoE with regard to the collateral referencing LIBOR. The assessment of collateral eligibility criteria and haircuts needed to protect public money are not normally informed by input from market participants. However, in this case, the unusually wide ramifications of LIBOR transition and the need to plan well ahead means that BoE sees merit in seeking views at a relatively early stage in the process.

 

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Comment Due Date: September 27, 2019

Keywords: Europe, UK, Banking, Securities, LIBOR, Collateral Referencing, Risk Management Approach, SONIA, Risk-Free Rates, Interest Rate Benchmarks, BoE

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