In a recent statement, BoE and FCA supported and encouraged liquidity providers in the USD linear interest rate swaps market to adopt new trading conventions for interdealer trading based on Secured Overnight Financing Rate (SOFR), instead of on London Interbank Offered Rate (LIBOR), from July 26, 2021. This is to facilitate a shift in the market liquidity toward SOFR, bringing benefits for a wide range of users as they move away from LIBOR.
The proposed change will involve interdealer brokers moving the primary basis of their pricing screens and curve construction for interest rate swaps from USD LIBOR to SOFR. At present, SOFR swaps are priced by default in reference to a LIBOR swap adjusted by the LIBOR-SOFR basis. As a result of this change, SOFR swaps would be the primary pricing point. LIBOR swaps would, therefore, be priced by reference to SOFR swaps adjusted by the LIBOR-SOFR basis. The same change would be made in the trading of swap spreads (swaps against bonds) in USD markets, such that the default pricing will show SOFR swaps relative to US Treasuries. For the avoidance of doubt, from July 26, 2021, FCA and BoE encourage all trading in USD LIBOR swaps, and USD LIBOR-based swap spreads in the interdealer broker market to be replaced with trading in SOFR swaps and SOFR-based swap spreads. USD LIBOR is expected to be accessible only as a basis swap to SOFR in the interdealer broker market from this date. However screens for outright LIBOR swaps and LIBOR-based swap spreads are expected to remain available for informational purposes, but not trading activity, until October 22, 2021.
Additionally, as per a recent statement form the US regulatory agency OCC, every bank, regardless of size, is expected to demonstrate that its replacement rate selections are appropriate for the bank’s products, funding needs, and operational capacities. The statement noted the importance of banks considering the strength of the fallback provisions they employ and noted that it is imperative that banks continue careful planning for the LIBOR transition. OCC examiners will continue to work with banks to ensure their full preparedness.
Keywords: Europe, Americas, UK, US, Banking, Securities, LIBOR, SOFR, Benchmark Reforms, Interest Rate Benchmarks, LIBOR Transition, OCC, FCA, BoE
Previous ArticleBIS and Nordic Central Banks Launch Innovation Hub in Stockholm
APRA issued a letter on the loss-absorbing capacity (LAC) requirements for domestic systemically important banks (D-SIBs) and published a discussion paper, along with the proposed the prudential standards on financial contingency planning (CPS 190) and resolution planning (CPS 900).
The European Commission (EC) launched a call for evidence, until March 18, 2022, as part of a comprehensive review of the macro-prudential rules for the banking sector under the Capital Requirements Regulation (CRR) and Directive (CRD IV).
The Financial Stability Board (FSB) published a report that sets out good practices for crisis management groups.
The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
Through a letter addressed to the banking sector entities, the Office of the Superintendent of Financial Institutions (OSFI) announced deferral of the domestic implementation of the final Basel III reforms from the first to the second quarter of 2023.
EIOPA recently published a letter in which EC is informing the European Parliament and Council that it could not adopt the set of draft regulatory technical standards for disclosures under the Sustainable Finance Disclosure Regulation (SFDR) within the stipulated three-month period, given their length and technical detail.
The Financial Conduct Authority (FCA) published the third in a series of policy statements that set out rules to introduce the UK Investment Firm Prudential Regime (IFPR), which will take effect on January 01, 2022.
The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.