Featured Product

    BoE Announces Consultation on Successor Rate to GBP LIBOR

    February 12, 2021

    BoE notified that the Working Group on Sterling Risk-Free Reference Rates published a consultation paper on a successor rate to the GBP LIBOR in legacy bonds referencing GBP LIBOR. The consultation paper seeks feedback on whether it would be helpful for the Working Group to make a recommendation on a successor rate to GBP LIBOR for bonds on the occurrence of a permanent cessation event or a pre-cessation event. The paper also seeks feedback on the successor rate to be recommended. This consultation period will remain open until March 16, 2021.

    Certain types of fallbacks in bond contracts referencing LIBOR, which will mature after the end of 2021, are intended to operate such that on the occurrence of a permanent cessation event or a pre-cessation event, an issuer would appoint an independent adviser to select a successor rate and a credit adjustment spread to be applied to such a successor rate, in each case on the basis of any formal recommendations made by a relevant nominating body or if no such recommendations have been made. The different successor rates proposed in this consultation paper are overnight SONIA (compounded in arrears) and term SONIA. The potential considerations set out in relation to the two options presented in this paper may be summarized as follows:

    • Alignment with other products. Use of compounded in arrears SONIA as a successor rate (Option 1) would be consistent with the existing market conventions in a wide range of products in sterling markets, including all SONIA-linked bonds issued to date, the SONIA swaps market, and the new ISDA fallbacks for LIBOR-linked swaps. By contrast, use of a term SONIA rate (Option 2) may be more consistent with the Alternative Reference Rates Committee (ARRC) recommended fallbacks for legacy bonds linked to USD LIBOR, if a USD term rate becomes available. In case of securitizations, consistency of rates between the underlying assets and the bond may also be a relevant factor.
    • Overall market structure. As noted in a statement published in January 2021, the Working Group anticipates that the large majority of sterling markets will be based on SONIA compounded in arrears, to provide the most robust foundation for the overall market structure; the Group has been working with the FICC Markets Standards Board (FMSB) to support development of a market standard for FMSB members in relation to an appropriately limited use of Term SONIA Reference Rates. The proposed FMSB standard is expected to be released for public comment in February. Once available, respondents may wish to take into account the proposed FMSB standard when considering their preferred potential successor rate for sterling bonds.
    • Implementation. Respondents may wish to take into account the degree to which the potential forms of a successor rate are compatible with the existing design of contracts and processes, as changes are likely to be required under both of the available options. Greater similarity in the structure of term SONIA rates relative to LIBOR under Option 2 may allow for these changes to be limited, including in relation to firms’ approaches to cash flow planning. However, use of SONIA compounded in arrears (Option 1) may require more change relative to legacy processes but provide greater alignment with established processes for newly issued bonds, in respect of which the determination of the interest rate and amount toward the end of the interest period is not considered to be significantly problematic.

    In addition, the Working Group on Sterling Risk-Free Reference Rates published a paper that sets out a potential methodology using SONIA-based rates, which could form a replacement for GBP LIBOR ICE Swap Rate (ISR). This paper is intended to support market participants to transition non-linear derivatives, structured products, and cash market instruments that reference the GBP LIBOR ISR, in line with the target milestones in the Working Group’s roadmap and priorities for 2021. The paper aims to document how the Non-Linear Derivatives Task Force (NLTF) has been considering the use of SONIA swap rates to develop a potential methodology for replacement of GBP LIBOR ISR. The replacement formula presented in this paper could be adapted to other markets where the discontinuation of the relevant ISRs is likely to trigger similar challenges. The ARRC in the U.S. has expressed an interest in this approach; consequently, the NLTF, on behalf of the Working Group and the ARRC, has agreed to engage in an international collaboration to address this issue.

     

    Related Links

    Comment Due Date: March 16, 2021

    Keywords: Europe, UK, Banking, Securities, LIBOR, Interest Rate Benchmark, Risk-Free Rates, Successor Rate, SONIA, Derivatives, BoE

    Related Articles
    News

    EC Regulation Sets Out Standards for Reporting and Disclosure of MREL

    EC published the Implementing Regulation 2021/763 that lays down implementing technical standards for supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities (MREL).

    May 12, 2021 WebPage Regulatory News
    News

    EBA Report Notes Loan Origination Should Remain in Supervisory Focus

    EBA published a report that examines the convergence of prudential supervisory practices in 2020 and offers conclusions of the EBA college monitoring activity.

    May 12, 2021 WebPage Regulatory News
    News

    APRA Decides to Standardize Submission Date for Quarterly Reporting

    APRA announced the standardization of quarterly reporting due dates for authorized deposit-taking institutions.

    May 11, 2021 WebPage Regulatory News
    News

    ECB Working Group Publishes Recommendations on EURIBOR Fallbacks

    The private sector working group of ECB on euro risk-free rates published the recommendations to address events that would trigger fallbacks in the Euro Interbank Offered Rate (EURIBOR)-related contracts, along with the €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered).

    May 11, 2021 WebPage Regulatory News
    News

    Bundesbank Publishes Supporting Documentation for Reporting by Banks

    Bundesbank published a list of "EntryPoints" that are accepted in its reporting system; the list provides taxonomy version and name of the module against each EntryPoint.

    May 11, 2021 WebPage Regulatory News
    News

    EBA Publishes Phase 1 of Reporting Framework 3.1

    EBA published the phase 1 of its reporting framework 3.1, with the technical package covering the new reporting requirements for investment firms (under the implementing technical standards on investment firms reporting).

    May 10, 2021 WebPage Regulatory News
    News

    IOSCO Sees Support for Mandatory Sustainability Reporting

    The Sustainable Finance Taskforce of IOSCO held two roundtables, with global stakeholders, on the IOSCO priorities to enhance the reliability, comparability, and consistency of sustainability-related disclosures and to collect views on the practical implementation of a global system architecture for these disclosures.

    May 10, 2021 WebPage Regulatory News
    News

    APRA to Finalize Capital Adequacy Standard Revisions by January 2022

    Asia Pacific Australia Banking APS 111 Capital Adequacy Regulatory Capital Basel RBNZ APRA

    May 10, 2021 WebPage Regulatory News
    News

    ESMA Issues Guidelines on Outsourcing to Cloud Service Providers

    ESMA published the final guidelines on outsourcing to cloud service providers.

    May 10, 2021 WebPage Regulatory News
    News

    EBA Publishes Data on Deposit Guarantee Schemes

    EBA published annual data for two key concepts and indicators in the Deposit Guarantee Schemes (DGS) Directive—available financial means and covered deposits.

    May 10, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6967