21 Jan 2020

The documentation published last week by both the Bank of England and the Working Group on Sterling Risk Free Reference Rates (RFRWG) highlights the importance which regulators are placing on LIBOR transition activities during 2020 and the need for firms to accelerate efforts to ensure they are prepared for LIBOR cessation by the end of 2021. The clue is in the heading of the associated press release which reads " Next steps for LIBOR transition in 2020: the time to act is now".
 
One of the most significant documents published was the text of a joint letter sent by the Bank of England and the FCA to senior managers of UK banks and insurers. The letter outlines a series of key targets for 2020 which have been set by RFRWG and which are expressly supported in the letter with the statement that "We expect all firms to play their part in meeting these targets. LIBOR transition plans should include the targets in project milestones and ensure that management information is available to track progress". The specified targets are to:

  1. Enable 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.
  2. Cease issuance of cash products linked to sterling LIBOR by end-Q3 2020.
  3. Significantly reduce the stock of LIBOR referencing contracts by Q1 2021. 

The letter includes a note of progress made during 2019. In some areas it appears that good progress on transition has been made with the Bank of England reporting that during the last six months of 2019 SONIA Overnight Index Swaps accounted for around 50% of cleared swaps by notional traded value. In addition, new issuances in the bond market have embraced SONIA with 85 new issuances since 2018 totalling over £40billion. However, whilst progress has been made, the figures are not quite as compelling elsewhere where the letter identifies the completion of 3 SONIA linked loans and a single conversion of a LIBOR loan to a SONIA loan. The letter notes that the pace of transition in the loan market will need to speed up during 2020 if these products are to be widely available and in use before the end of 2021.
 
In the letter, firms are encouraged to take action from Q1 2020 in relation to product planning, infrastructure development (including updated loan system capabilities), client communications and awareness and updating documentation. The letter makes clear that the FCA and the PRA will be stepping up engagement with firms on LIBOR transition through its supervisory relationship with firms and will be assessing progress. The letter also highlights that the Financial Policy Committee will be reviewing progress by mid-2020 to consider whether sufficient progress is being made to avoid seeking recourse to supervisory tools. In this final point, the message that the "time to act is now" is made very clear.