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    BoE Notice on Eligibility of LIBOR-Linked Collateral for Use in SMF

    May 07, 2020

    BoE issued a Market Notice on its risk management approach to collateral referencing London Inter-bank Offered Rate (LIBOR) for use in Sterling Monetary Framework or SMF. All LIBOR-linked collateral, regardless of the issuance or origination date, will be ineligible for use in Sterling Monetary Framework from December 31, 2021. Also, all LIBOR-linked loans issued on or after April 01, 2021 will be ineligible for use in the Sterling Monetary Framework.

    According to the notice, all collateral securities issued on or after April 01, 2021 and maturing after December 31, 2021 will be ineligible for use in the Sterling Monetary Framework where:

    • Coupon pays a rate of interest calculated by reference to LIBOR
    • Embedded swap payments are calculated by reference to LIBOR
    • One or more loans in the portfolio are a LIBOR-linked loan originated after April 01, 2021, in case where the collateral securities are backed by loans

    However, LIBOR-linked collateral may otherwise still be requested for eligibility until December 31, 2021. BoE will monitor market developments in relation to fallback language and will keep under review the potential to distinguish between LIBOR-linked collateral with robust fallback language and that without, as market practice develops. The current intention of BoE is to update the list of eligible securities that are impacted by this policy on a monthly basis.

    Pursuant to the notice, a haircut add-on will also be applied to all LIBOR-linked collateral. It will be 10 percentage points from April 01, 2021, 40 percentage points from September 01, 2021 and 100 percentage points from December 31, 2021. In respect of loan portfolios containing both LIBOR-linked loans (maturing after December 31, 2021) and other loans, the Sterling Monetary Framework 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. Throughout this notice, LIBOR refers to GBP LIBOR, USD LIBOR, EUR LIBOR, JPY LIBOR and CHF LIBOR. 

    Related Link: Market Notice

    Keywords: Europe, UK, Banking, Securities, LIBOR, Credit Risk, Fallback Language, Risk-free Rates, Sterling Monetary Framework, Haircut, Benchmark Reforms, BoE

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