BoE released a statement on behalf of the Working Group on Sterling Risk-Free Reference Rates. The statement provides an update on progress in the adoption of SONIA in sterling markets, including work underway to develop a term benchmark based on that risk-free rate. The statement highlights that, in the derivative markets, the share of swaps traded using SONIA is already broadly equivalent to that linked to LIBOR.
It is now just over a year since the BoE implemented reforms to the SONIA interest rate benchmark, improving the sustainability and representativeness of the chosen alternative risk-free reference rate in UK. Following that change, sterling-denominated financial markets have begun to shift decisively away from LIBOR and toward SONIA. In the derivative markets, the share of swaps traded using SONIA is already broadly equivalent to that linked to LIBOR. Liquidity and open interest in SONIA futures is also growing steadily. SONIA is also being adopted in cash markets. SONIA-linked Floating Rate Notes (FRNs) have rapidly become the market norm and LIBOR-linked sterling FRN issuance beyond 2021 has all but ceased. Recent weeks also saw the issuance of the first distributed SONIA-linked Residential Mortgage-Backed Security (RMBS). Looking ahead, the next goal is to reduce reliance on LIBOR in other sterling cash markets, including loans.
Given the rapid development of liquidity in markets referencing overnight SONIA, the Working Group anticipates that corporate borrowers will increasingly prefer contracts that reference compounded overnight SONIA. For those already able and willing to do so, the Working Group encourages providers and users of such products to press ahead with their transition efforts, thus reducing the risk of disorderly adjustment closer to end-2021 and helping to develop liquidity in SONIA-referencing markets even further. The Working Group also supports the work underway to develop a term benchmark based on the sterling risk-free rate, known as a Term SONIA Reference Rate (TSRR).
In December 2018, the Working Group had published a statement inviting interested benchmark administrators to consider the summary of responses to the TSRR consultation and to share any views on the development of such benchmarks. Three administrators (FTSE Russell, ICE Benchmark Administration, and Refinitiv) have confirmed that they are working on the development of a TSRR, with each delivering a short factual presentation to the Working Group at a meeting on May 14, 2019. Over the remainder of 2019, the Working Group expects that administrators will work to establish if a robust TSSR, compliant with international standards, can be produced on a timetable consistent with the broader transition work. The Working Group welcomes these developments and has established a new Task Force to ensure that this work remains on track.
PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5).
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS published a statement guidance on dividend distribution by banks.
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.