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    BoE Reviews Bank Resolvability, Consults to Remove USD LIBOR Contracts

    June 10, 2022

    The Bank of England (BoE) published its first assessment of the eight major UK banks’ preparations for resolution under the Resolvability Assessment Framework (RAF). BoE is also proposing to modify the scope of contracts that are subject to the clearing obligation, by adding Overnight Index Swaps (OIS) that reference the Secured Overnight Financing Rate (SOFR) and, subsequently, removing the contracts referencing USD LIBOR; this consultation is open until July 21, 2022.

    Resolvability assessment of major UK banks

    The eight major UK banks in scope of RAF reporting are Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest, Santander UK, Standard Chartered, and Virgin Money UK. These eight banks have made a great deal of progress in enhancing their preparations for resolution and embedding these within their organizations. The assessment of resolvability shows that even if a major UK bank were to require resolution, customers would be able to keep accessing their accounts and business services as normal. Shareholders and investors, not taxpayers, would be first in line to bear banks’ losses and the costs of recapitalization. However, BoE has identified a number of thematic and firm-specific areas where further work is needed for firms to meet the expectations of BoE and ensure they remain ready for resolution. Funding in resolution and restructuring planning, in particular, are areas requiring relatively more work across the sector. BoE has identified “shortcomings” for three firms (HSBC, Lloyds Banking Group, and Standard Chartered) and “areas for further enhancement” for six firms (Barclays, HSBC, Nationwide, NatWest, Standard Chartered, and Virgin Money UK). The findings are specific to individual firms, their business models, and resolution strategies and cannot be compared directly with one another. BoE will repeat its assessment of the major UK banks in 2024 and every two years thereafter. Future assessments are likely to be focused on particular areas of importance or weakness and will include more detailed verification of firms’ preparations by BoE, building on the review of firms’ own assurance arrangements considered as part of this first assessment.

    Consultation on derivatives clearing obligation

    BoE is proposing to modify the contract types that are subject to the clearing obligation in the onshored Binding Technical Standards (BTS) 2015/2205; it proposes to:

    • add OIS contracts that reference SOFR, to come into force on October 31, 2022
    • subsequently remove contracts that reference USD LIBOR, to come into force around the same time as a number of central counterparties contractually convert these contracts and remove them from their list of contracts eligible for clearing

    The SOFR OIS contract type in the clearing obligation will broadly cover the same maturity range as the USD LIBOR contracts currently cover. BoE proposes a minimum maturity for the SOFR OIS contract type of 7 days (as opposed to 28 days for the USD LIBOR contracts currently subject to the clearing obligation). This reflects the differences in the types of transactions these contract types have historically been used in. The consultation forms part of the work of BoE to reflect the reforms to interest rate benchmarks and, in particular, the discontinuation of the USD LIBOR benchmark in June 2023. The proposed changes will be implemented using a single standards instrument (proposed technical standards). The proposed technical standards will be split into two parts to reflect different dates for the relevant modifications. The draft technical standards can be found in the Appendix of the consultation paper.


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    Keywords: Europe, UK, Banking, Resolution Framework, Resolvability Assessment Framework, Clearing Obligation, Interest Rate Benchmarks, LIBOR, SOFR, Overnight Index Swaps, Benchmark Reforms, Basel, Credit Risk, BoE

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