LIBOR to RFR Transition LIBOR to RFR Transition LIBOR to RFR Transition

After 2.5 years of discussion on the challenges of LIBOR transition, SONIA liquidity is beginning to grow in the UK market. Yesterday the UK regulators clearly signalled that 'the time to act is now' by setting out the measures they expect firms to take in Q1 2020 to meet the agreed industry LIBOR transition deadlines. Firms should take action to ensure progress otherwise, regulators warn, further supervisory tools could be deployed.

The Bank of England (BoE), the Financial Conduct Authority (FCA) and the Working Group on Sterling Risk-Free Reference Rates (RFRWG) published a number of documents yesterday that emphasis that firms need to accelerate their efforts to prepare for the LIBOR cessations by end-2021.

The key document for firms to read is the joint BoE and FCA letter (PDF 147 KB) to all major UK-supervised banks and insurers. This notes that 2020 will be a key year for the transition, with the BoE and FCA supporting the RFRWG targets for 2020 which are:

• Enabling a further shift of volumes from LIBOR to SONIA in derivative markets, supported by a statement from the Bank and FCA encouraging a switch in the convention for sterling interest rate swaps from 2 March 2020
• Ceasing issuance of cash products linked to sterling LIBOR by end-Q3 2020
• Significantly reducing the stock of LIBOR referencing contracts by Q1 2021

In Q1 2020, the FCA and BoE will be looking for clear evidence of firms actively engaging with the wider transition efforts of the market. They have highlighted key action areas for which they expect to see firms planning and tracking in Q1 2020:

• Product development
• Reviewing infrastructure, including updating loan system capabilities
• Client communication and awareness
• Updating documentation

The regulators will monitor firms' progress on the LIBOR transition by increasing supervisory engagement and by reviewing management information, in particular how firms' transition plans reflect the RFRWG targets.

The BoE Financial Policy Committee will consider in mid-2020 whether sufficient transition progress is being made by firms. If not, further supervisory tools could be used to reach the FPC's intention 'that sterling LIBOR will cease to exist after the end of 2021. No firm should plan otherwise.'

To support the above actions, firms will find it useful to review the following documents that the RFRWG also published on the 16 January 2020:

• 'Lessons learned' (PDF 331 KB) from recent conversions of legacy LIBOR bond contracts by consent solicitation.
• A factsheet (PDF 334 KB) clarifying the “whys” and “whats” of LIBOR transition and why all market participants need to act now. This factsheet will be useful for client communication.
• A document (PDF 1.01 KB) setting out the RFRWG's views on which types of business and client should use overnight SONIA, relative to alternatives including forward-looking term rates. This concludes that use of SONIA compounded in arrears is appropriate and operationally achievable for 90% of new loans by value. The BoE and FCA support this conclusion.
• The RFRWG 2020 priorities and updated roadmap which highlights the important milestones which firms should incorporate in their planning.