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    BoE and FCA Encourage Switch to SONIA for Exchange-Traded Derivatives

    May 14, 2021

    BoE and FCA published a statement to support and encourage market participants to switch to new trading in sterling exchange-traded derivatives that expire after the end of 2021 from GBP LIBOR to SONIA, from June 17, 2021. In the period leading up to June 17, 2021, BoE and FCA will engage with market participants to determine whether market conditions allow the switch to proceed smoothly. The move is expected to facilitate a further shift in market liquidity toward SONIA, bringing benefits for a wide range of users as they move away from LIBOR.

    A key milestone recommended by the Working Group on Sterling Risk-Free Reference Rates is to cease initiation of new GBP LIBOR exchange-traded derivatives expiring after 2021, by the end of second quarter of 2021, other than for risk management of existing positions. The Working Group milestones have supervisory backing from the PRA and FCA as set out in a recent "Dear CEO" letter sent to regulated firms. To support market participants in meeting this milestone, the Working Group’s update on "Path to ending new use of GBP LIBOR linked derivatives" had suggested exploring the potential to change standard trading conventions in exchange traded derivatives to a SONIA basis during the second quarter of 2021. To determine support for, and the feasibility of, this approach, FCA has engaged with a broad set of participants in the exchange traded derivatives markets, including liquidity providers, bank dealers, buy-side firms, and exchanges. An FCA survey of these market participants identified strong support for a change in the standard trading conventions, which would see SONIA rather than LIBOR become the default traded instrument from June 17, 2021.

    This is an extension of the successful similar change to the interdealer quoting convention for linear sterling swaps during the fourth quarter of 2020. That change supported a substantial move in trading volumes from GBP LIBOR to SONIA over subsequent months and, thus, helped to reduce risk around LIBOR transition before the end of 2021. Extending this to exchange-traded derivatives is intended to increase alignment in sterling markets and help to accelerate a reduction in new LIBOR exposures. SONIA derivatives are likely to be the appropriate market convention for most contracts, particularly those maturing after 2021. The proposed change will involve market participants switching new trading in sterling exchange-traded derivatives that expire after the end of 2021 from GBP LIBOR to SONIA. These changes would not prohibit trading in GBP LIBOR exchange-traded derivatives, which would remain available until later in 2021 to facilitate risk management of existing positions, but would accelerate SONIA, rather than GBP LIBOR, becoming the primary source of liquidity. This, in turn, should encourage a greater proportion of GBP exchange-traded derivative trading volumes to switch to SONIA.

     

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    Keywords: Europe, UK, Banking, Securities, Derivatives, SONIA, LIBOR, Exchange Traded Derivatives, Benchmark Reforms, Interest Rate Benchmarks, FCA, BoE

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