May 15, 2019

BoE released a statement on behalf of the Working Group on Sterling Risk-Free Reference Rates. The statement provides an update on progress in the adoption of SONIA in sterling markets, including work underway to develop a term benchmark based on that risk-free rate. The statement highlights that, in the derivative markets, the share of swaps traded using SONIA is already broadly equivalent to that linked to LIBOR.

It is now just over a year since the BoE implemented reforms to the SONIA interest rate benchmark, improving the sustainability and representativeness of the chosen alternative risk-free reference rate in UK. Following that change, sterling-denominated financial markets have begun to shift decisively away from LIBOR and toward SONIA. In the derivative markets, the share of swaps traded using SONIA is already broadly equivalent to that linked to LIBOR. Liquidity and open interest in SONIA futures is also growing steadily. SONIA is also being adopted in cash markets. SONIA-linked Floating Rate Notes (FRNs) have rapidly become the market norm and LIBOR-linked sterling FRN issuance beyond 2021 has all but ceased. Recent weeks also saw the issuance of the first distributed SONIA-linked Residential Mortgage-Backed Security (RMBS). Looking ahead, the next goal is to reduce reliance on LIBOR in other sterling cash markets, including loans.

Given the rapid development of liquidity in markets referencing overnight SONIA, the Working Group anticipates that corporate borrowers will increasingly prefer contracts that reference compounded overnight SONIA. For those already able and willing to do so, the Working Group encourages providers and users of such products to press ahead with their transition efforts, thus reducing the risk of disorderly adjustment closer to end-2021 and helping to develop liquidity in SONIA-referencing markets even further. The Working Group also supports the work underway to develop a term benchmark based on the sterling risk-free rate, known as a Term SONIA Reference Rate (TSRR). 

In December 2018, the Working Group had published a statement inviting interested benchmark administrators to consider the summary of responses to the TSRR consultation and to share any views on the development of such benchmarks. Three administrators (FTSE Russell, ICE Benchmark Administration, and Refinitiv) have confirmed that they are working on the development of a TSRR, with each delivering a short factual presentation to the Working Group at a meeting on May 14, 2019. Over the remainder of 2019, the Working Group expects that administrators will work to establish if a robust TSSR, compliant with international standards, can be produced on a timetable consistent with the broader transition work. The Working Group welcomes these developments and has established a new Task Force to ensure that this work remains on track. 

 

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