The Financial Conduct Authority (FCA) and the Bank of England (BoE) jointly announced that they will support and promote the adoption of new quoting conventions for inter-dealer trading based on SONIA instead of LIBOR starting from 27 October 2020 in the Sterling swaps market. The proposed changes involve moving the primary basis of pricing screens and curve construction for interest rate swaps from GBP LIBOR to SONIA which indicates the primary source of pricing and liquidity will need to switch from GBP LIBOR swaps to SONIA swaps. The changes intend to facilitate further market liquidity shift towards SONIA-linked swaps, providing benefits for a wide range of end users and market participants in transitioning away from LIBOR.
KPMG’s perspective: Given the readiness of the SONIA derivatives market, the initiative indicates further regulatory efforts in pushing movements of new sterling swaps trading referencing to SONIA and reducing LIBOR-linked exposures. Financial Institutions should take note of further updates regarding the transition in the UK derivatives market for useful industry references especially when considering the pricing of new ARR-based derivatives.
28 September 2020 BoE
2. HKMA urged asset managers and companies to be better prepared for the LIBOR transition by the end of 2021
The Hong Kong Monetary Authority (HKMA) indicated the need for asset managers and institutions to accelerate their effort in preparing for the LIBOR discontinuation before the end of 2021. Based on the key transition milestones previously announced by HKMA, Banks should be able to offer financial products using ARRs by the 1st of January 2021, and cease issuance of LIBOR-referenced products with maturity after 2021 by the 30th of June 2021. According to Howard Lee, the Deputy Chief Executive of HKMA, some market segments are still lagging behind the banking sector in terms of transition effort and there is still a significant gap observed among these benchmark users on the awareness of and readiness for the LIBOR transition.
KPMG’s perspective: In light of the key transition milestones set by the HKMA, a number of Banks have started the construction of a bank-wide transition plan since earlier this year planning out key steps of the LIBOR phase-out. Asset managers and financial institutions should start to formulate individual transition plans following the movement in the banking sector in particular on managing changing systems and processes and developing new fallback language as soon as practicable.
3. MAS to step up supervision of banks to ensure smooth transition to SORA by the end of 2021
The Monetary Authority of Singapore (MAS) is planning to step up supervisory engagement to ensure that Singapore Banks keep pace with the interest rate benchmark transition timeline between now and the end of 2021. Ms Jacqueline Loh, the deputy managing director for markets and development in MAS stated on the 9th of September that Banks will potentially expose themselves to additional market, liquidity, operational, technology and legal risks if they do not keep up with the industry transition progress. In the remaining months, the industry-led steering committee in Singapore is expected to focus on the transition of legacy contracts impacted by the SOR reform.
KPMG’s perspective: Regulators in Singapore continue to be one of the leading players in supporting the LIBOR transition and pushing industry development in Asia, Financial Institutions should look to take reference from any early market conventions established in Singapore at the individual-firm level including preparing appropriate contractual fallbacks, ensuring the readiness of systems and models and ultimately offering new ARR based products.
The United States Department of Justice announced the completion of its review of the proposed amendments by the International Swaps and Derivatives Association (ISDA) on the standardised model documentation for derivatives contracts (the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement) post the LIBOR discontinuation. DOJ recognised ISDA’s proposed amendments for derivative contracts as part of a large effort in driving the use of alternative reference rates in financial instruments to replace IBORs. In the Business Review Letter, DOJ concluded the proposed amendments by ISDA are unlikely to harm competition and offers substantial benefits to the industry by allowing flexibility for market participants to designate alternative reference rates which they deemed appropriate.
KPMG’s perspective: According to ISDA’s latest statement on the 23rd of September (Please refer to the below article for more information), upon receiving a Positive Business Review Letter from the US DoJ to the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement, next steps will be starting to finalize work with competition authorities in other jurisdictions prior the launch of the detailed documentation. Although the official launch date of the IBOR Fallbacks Protocol is still uncertain, market participants should be ready for the upcoming changes which will apply to all new derivatives referencing the 2006 ISDA Definitions and certain legacy derivative contracts. Upon the official release of the IBOR Fallbacks Protocol, Banks should also revisit any contractual fallback mechanism in order to align with the ISDA fallback protocol.
1 October 2020 DOJ
2. ISDA issued latest updates on the timetable of publishing new IBOR fallbacks for derivative contracts
The International Swaps and Derivatives Association (ISDA) issued a letter with updates on the publication timeline of the IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement with respect to the implementation of new fallbacks for legacy and new derivative contracts. The ultimate timetable will depend upon the receipt of a Positive Business Review Letter from the US DoJ followed by finalizing work with competition authorities in other jurisdictions. The effective date for the IBOR Fallbacks Protocol and IBOR Fallbacks Supplement is expected to be around mid- to late-January 2021. Upon the effective date, all new derivatives with reference to the 2006 ISDA Definitions will automatically include the updated fallbacks for covered IBORs.
KPMG’s perspective: Banks should pay close attention to the IBOR Fallback Protocol soon to be published by ISDA as well as any updates in the publication timeline. Although the adoption to the IBOR Fallback Protocol will be voluntary, Banks are advised to take detailed reference from the IBOR Fallback Protocol for industry guidance to prepare appropriate fallback mechanism and spread calculation for new and legacy derivative contracts. Market participants are also expected to prepare for the October switch by CCPs to SOFR discounting and price alignment interest for cleared USD interest rate derivatives, as well as developing the necessary enhancements to systems and processes to support the new ARR products.
23 September 2020 ISDA
3. FCA published new webpage to support firms in the LIBOR transition
The Financial Conduct Authority (FCA) published a new webpage to provide more advice to companies on transitioning away from LIBOR at the individual-firm level. Key considerations proposed by the FCA include analysis of balance sheet exposure, conducting an end-to-end inventory of LIBOR-linked exposure and assessment of the impacted processes and systems, identification on the level of impact on the finances and products choices available to clients resulting from the LIBOR transition and general guidelines for firms to take note regarding the LIBOR transition path and the key transition milestones set out by the Working Group on Sterling Risk Free Reference Rates. Further information was provided by different business activities and the FCA webpage will continue to be updated periodically to support companies’ smooth transition.
KPMG’s perspective: This is another useful reference guide issued by the FCA for market participants especially firms outside of the banking sector to consider while preparing for their individual transition plan. Firms should familiarise themselves with the updated industry guidelines as well as the LIBOR transition milestones set out by their local regulators to keep up with the overall transition timeline.
17 September 2020 FCA