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    BoE and FCA Encourage Switch to SONIA in Interest Rate Swap Markets

    September 28, 2020

    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.


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    Keywords: Europe, UK, Banking, Securities, COVID-19, SONIA, LIBOR, Interest Rate Benchmarks, Interest Rate Swaps, Derivatives, FCA, BoE

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