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    BoE Publishes Notice on Collateral Referencing LIBOR for Use in SMF

    February 26, 2020

    BoE published a market notice that forms part of the Documentation for the operations of BoE under the Sterling Monetary Framework (SMF). Pursuant to this market notice, a haircut add-on will be applied to all LIBOR Linked Collateral. The haircut add-on will be 10 percentage points from October 01, 2020, 40 percentage points from June 01, 2021 and 100 percentage points from December 31, 2021. To avoid doubt, haircuts will be capped at 100%. The market notice mentions that BoE will monitor market developments in relation to fallback language and will keep under review the potential to distinguish between LIBOR Linked Collateral with and without robust fallback language, as market practice develops.

    In respect of Loan Portfolios containing both LIBOR Linked Loans and other loans, SMF participants may choose to either remove the LIBOR Linked Loans from the Loan Portfolios, or alternatively split these Loan Portfolios subject to them meeting the standard collateral eligibility requirements of BoE. The market notice makes the following changes to the eligibility of LIBOR Linked Collateral:

    • From October 01, 2020, all securities issued on or after that date and maturing after December 31, 2021, where the coupon pays a rate of interest calculated by reference to LIBOR, will be ineligible for use in the SMF
    • From October 01, 2020, all securities issued on or after that date and maturing after December 31, 2021, where embedded swap payments are calculated by reference to LIBOR, will be ineligible for use in the SMF
    • From October 01, 2020, all securities issued on or after that date and maturing after December 31, 2021, backed by loans where one or more loans in the portfolio is a LIBOR Linked Loan that was originated after October 01, 2020, will be ineligible for use in the SMF
    • From October 01, 2020, all LIBOR Linked Loans issued on or after that date will be ineligible for use in the SMF
    • From December 31, 2021, all LIBOR Linked Collateral, regardless of the issuance or origination date, will be ineligible for use in the SMF.

    Except as described above, LIBOR Linked Collateral may otherwise still be requested for eligibility until December 31, 2021. BoE intends to update, on a monthly basis, the list of eligible securities that are impacted by this policy.

     

    Related Link: Market Notice

     

    Keywords: Europe, UK, Banking, Securities, Haircut, LIBOR, Collateral, Fallback Language, Sterling Monetary Framework, BoE

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