The Bank of England (BoE) published the final policy statement on the proposal to add overnight index swaps (OIS) that reference the Secured Overnight Funding Rate (SOFR) to the scope of contracts subject to the derivatives clearing obligation (DCO) and to remove contracts referencing USD LIBOR. Also published was the feedback on the responses received to the June proposal on this topic.
The policy statement has been implemented via amendments to the onshored Binding Technical Standards 2015/2205 and is relevant to financial and non-financial counterparties that are subject to the derivatives clearing obligation under the onshored European Market Infrastructure Regulation (EMIR) as well as to central counterparties. The BoE's final policy maintains the proposal in the June consultation paper to add SOFR OIS contracts with an original maturity between 7 days and 50 years to the DCO from October 31, 2022 and to subsequently remove contracts referencing USD LIBOR. In the June consultation paper, BoE had also proposed to align the date on which USD LIBOR contracts will be removed from the DCO with central counterparties’ (CCPs) contractual conversions of those contracts (which we anticipated would occur in Spring 2023). Consistent with that proposal, contracts referencing USD LIBOR will be removed from the DCO on April 24, 2023.
Since the publication of the June consultation paper, a number of central counterparties have firmed up their plans for those contractual conversions. In particular, LCH Ltd has confirmed it expects to convert such contracts over two weekends: 22–23 April 2023 and 20–21 May 2023 while CME Group is consulting on its proposal to do so over the weekend of May 20-21, 2023. The standards instrument in the appendix has now been made. The instrument includes specific dates on which each of the modifications to the DCO will come into force. The policy set out in this Policy Statement has been designed in the context of the UK having left the European Union and the transition period having come to an end. Unless otherwise stated, any references to EU or EU-derived legislation refer to the version of that legislation, which forms part of the retained EU law
Keywords: Europe, UK, Banking, Clearing Obligation, Interest Rate Bechmarks, LIBOR, SOFR, Overnight Index Swaps, Benchmark Reforms, Basel, Credit Risk, BoE
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