BoE and FCA Encourage Switch to SONIA in Interest Rate Swap Markets
BoE and FCA are supporting and encouraging liquidity providers in the sterling swaps market to adopt new quoting conventions for inter-dealer trading based on SONIA, instead of LIBOR, from October 27, 2020. The intention is to facilitate the further shift in market liquidity toward SONIA swaps, bringing benefits for a wide range of end-users and other market participants as they move away from the use of LIBOR.
A key milestone recommended by the Working Group on Sterling Risk-Free Reference Rates is to cease initiation of new GBP LIBOR-linked linear derivatives expiring after 2021, by end of the first quarter of 2021, other than for risk management of existing positions. In support of this milestone, FCA has engaged with interest rate swap liquidity providers as well as interdealer brokers to determine support for a change in the quoting conventions of sterling interest rate swaps in the interdealer market. An FCA survey of liquidity providers identified strong support for a change in the interdealer quoting convention that would see SONIA, rather than LIBOR, become the default price from October 27, 2020, subject to prevailing market conditions at that time. The survey also showed that a large majority supported a move away from the use of GBP LIBOR forward rate agreements to the use of single period swaps that benefit from greater compatibility with the anticipated ISDA IBOR fallbacks protocol.
The switch to SONIA has been also endorsed by the Working Group on Sterling Risk-Free Reference Rates and has been included as an update to its roadmap for transition in sterling markets. BoE and FCA, therefore, support and encourage all participants in these interdealer markets to take the steps necessary to prepare for and implement these changes to market conventions. A previously planned initiative to accelerate a change in quoting conventions, which was due to have taken place in March 2020, was disrupted by the impact of COVID-19 pandemic. The changes with respect to convention switch would not prohibit trading in GBP LIBOR swaps, but they would mean that the primary source of pricing and liquidity will switch from GBP LIBOR swaps to SONIA swaps. This, in turn, should encourage a greater proportion of swap trading volumes to switch to SONIA.
Related Links
Keywords: Europe, UK, Banking, Securities, COVID-19, SONIA, LIBOR, Interest Rate Benchmarks, Interest Rate Swaps, Derivatives, FCA, BoE
Featured Experts
Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.
Related Articles
EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
MAS Amends Notice on Related Party Transactions of Banks
MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.
EBA Updates Lists of Entities for Use in Capital Calculations under SA
EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.
ECB Amends Guideline on Euro Short-Term Rate
ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.
EBA Consults on Standards Related to FRTB-SA
EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).
PRA Proposes Rules Related to IRB Approach for Credit Risk
PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.
BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK
The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.
FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks
FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.
OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks
OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.
EU Amends CRR and Securitization Regulation in Response to Pandemic
To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).
