A critical step in the necessary shift in global interest rate markets towards more robust foundations was reached on 31 December 2021, as most LIBOR settings were published for the final time. Sterling markets navigated this transition on time and with minimal disruption, supporting global transition efforts towards alternative risk-free reference rates (RFRs). The Bank of England, FCA and Working Group are now able to reflect on achievements in sterling markets, set out what more needs to be done and provide an update on how the Working Group will operate in the future.
Progress in sterling markets
Overnight SONIA, compounded in arrears, is now fully embedded across sterling markets. Successful CCP conversion processes during December 2021 saw some of the largest single day amendments to financial contracts, with in excess of £13 trillion LIBOR-referencing contracts converted to SONIA. As a result, there are effectively no longer any sterling LIBOR linked cleared derivatives. The implementation of ISDA’s IBOR Fallbacks saw a further reduction in the legacy stock of LIBOR-linked derivatives. In cash markets, SONIA floating rate note issuance since 2018 exceeds £120bn, and new SONIA lending exceeds £100bn across a diverse range of sectors and facility types. The Bank of England now estimates that, across all asset types, less than 2% of the total sterling LIBOR legacy stock remains and notes that firms, as expected by the Bank of England and FCA, have plans to address this residual exposure.
What more needs to be done?
The Bank of England, FCA and Working Group encourage firms to continue to pursue the active transition of legacy sterling LIBOR contracts currently using the temporary synthetic LIBOR. Transitioning these contracts to permanent robust alternatives remains the best way to retain control and economic certainty over existing agreements. The FCA has been clear that synthetic LIBOR is a temporary bridge to RFRs, and its availability is not guaranteed beyond end-2022. The FCA must review its availability annually. During the course of 2022, the FCA will seek views on retiring 1-month and 6-month synthetic sterling LIBOR at the end of 2022, and on when to retire 3-month sterling synthetic LIBOR.
The transition from US dollar LIBOR remains of critical importance globally, including in the UK where many firms are active in US dollar interest rate markets. To support the transition from US dollar LIBOR the FCA’s prohibition on its use in certain new contracts came into effect from the start of 2022, in line with US supervisory guidance. UK supervised entities should no longer be using US dollar LIBOR in new contracts, with limited exceptions. The Bank of England, FCA and the Working Group encourage transition to robust alternative rates, such as SOFR. Supervisors will continue to monitor UK regulated entities’ progress in transition.
How the Working Group will operate going forward
The Working Group concluded at its January meeting that it had met its objective to ‘catalyse a broad-based transition to SONIA across sterling derivative, loan and bond markets’. There remains further work to be done to finalise the transition from LIBOR, primarily to support the continued active conversion of legacy sterling LIBOR-linked bonds and loans that are dependent on temporary synthetic LIBOR; and to consider any implications of non-sterling LIBOR transition in UK markets. The Working Group will therefore be moving forwards in an amended form and with new objectives, and with continued support from the Bank of England and FCA.
As he steps down as Chair of the Working Group, the Bank of England and FCA thank Tushar Morzaria, Group Finance Director at Barclays, for his strong leadership on sterling LIBOR transition. We are pleased to welcome Sarah Boyce (Association of Corporate Treasurers) as the new Chair of the Working Group from 1 March 2022 to lead the group in the next phase of its work.
Andrew Bailey, Governor of the Bank of England, said: ‘It is difficult to think of a more far-reaching and substantial market shift in recent years than the transition away from LIBOR. Following the ambitious roadmap laid out in 2017 to move markets to more robust risk-free rate alternatives, market participants have dedicated significant resources to ensuring a smooth transition and deliver a more robust financial system. The fact that most LIBOR settings ended at end-2021 with minimal disruption is a testament to the co-operation across a wide range of industry sectors and jurisdictions. With only a few settings remaining to facilitate the further wind-down of existing exposures, I would like to thank all involved for their efforts and encourage those with remaining LIBOR exposures to see this project through to its very end.’
Tushar Morzaria, Chair of the Working Group on Sterling Risk-Free Reference Rates, said: ‘It has been an honour and a pleasure to guide the Working Group through one of the most complex market transformations of our lifetimes. I’m deeply grateful for the tireless efforts of our broad membership, over many years, to enable an orderly transition of the sterling interest rate markets to a more robust reference rate.’
Andrew Hauser, Executive Director for Markets at the Bank of England, said: ‘The success of the transition from sterling LIBOR is a reflection of the expertise and efforts of the UK’s financial sector. A deep and liquid set of SONIA-based markets has been established, providing users with a more robust and resilient foundation to support their financial needs in the years to come.’
Edwin Schooling Latter, Director of Markets and Wholesale Policy and Wholesale Supervision at the FCA, said: ‘We are grateful to all market participants who have contributed to the Working Group and the delivery of a smooth transition away from sterling LIBOR – moving interest rate markets to a more robust, more transparent, more appropriate foundation. There is still work to be done to remove remaining dependencies on LIBOR, but the experience gained will help continued progress.’
Notes to editors
See the FCA’s summary in: Changes to LIBOR as of end-2021.
This transition was delivered through a partnership between public and private sectors, initiated through the creation of the Working Group on Sterling Risk-Free Reference Rates (the Working Group), which has facilitated the transition in UK markets. Harnessing expertise from a broad base of market participants, the Working Group set a path to transition through industry recommended milestones, supported by the PRA and FCA. The Bank of England and FCA provided additional support by co-ordinating a number of ‘SONIA First’ initiatives, to help build liquidity in SONIA linked sterling derivative markets. The Working Group was convened by the Bank of England in 2015, in response to the Financial Stability Board’s (FSB) 2014 recommendations on interest rate benchmark reform. In April 2017, the Working Group recommended a reformed Sterling Overnight Index Average (SONIA) as its preferred RFR. Following the Bank of England’s reform of SONIA, the Working Group’s mandate was expanded in 2018, setting an overall objective to catalyse a broad-based transition to SONIA by end-2021 across sterling bond, loan and derivative markets, in order to reduce the financial stability risks arising from the widespread reliance of financial markets on LIBOR. Along with its renewed mandate, the Working Group also expanded its membership, ensuring participants were included from banks, asset managers, insurers, trade associations and non-financial corporates.
In December 2021, central clearing parties (CCPs) LCH, CME, Eurex, ICE and CurveGlobal Markets successfully converted outstanding LIBOR contracts referencing CHF, EUR, GBP and JPY spanning beyond end-2021 to relevant risk-free rates.
Some residual GBP LIBOR cleared swaps remain due to legacy trades in their final coupon period. These will all mature by end-2022. LCH’s swaption solution converts any sterling underlying to a SONIA equivalent on an intraday basis.
The International Swaps and Derivatives Association (ISDA) 2020 IBOR Fallbacks Protocol has been adhered to by over 15,000 entities worldwide and includes both ISDA and non-ISDA members. The Index Cessation Effective Date (for the purposes of the ISDA IBOR Fallbacks Protocol and Supplement) for relevant GBP, JPY, CHF and EUR LIBOR settings fell on 04 January 2022.
The ISDA 2020 IBOR Fallbacks only apply to contract reset dates which occur on or after the Index Cessation Effective Date. Accordingly, some contracts may transition to risk-free rates later in 2022, under the terms of the fallback.
The PRA has published its 2022 priorities for UK Deposit Takers and International Banks Active in the UK. Together with the FCA, the PRA will be closely monitoring actions to remove any remaining dependencies on LIBOR, including synthetic LIBOR.
Further arrangements for the orderly wind-down of LIBOR at end-2021.
FCA confirms rules for legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR
The US Alternative Reference Rates Committee (the ARRC) has recommended the Secured Overnight Financing Rate (SOFR) as its nominated alternative rate to US dollar LIBOR. See the ARRC’s website for further details.