May 20

May 20, 2021 | IBOR Transition

  • On Thursday May 20th the FCA published a consultation on how the FCA will propose to use two new powers introduced through amendments to the UK BMR. The deadline is June 17th, the data on which SONIA must be the default rate foe exchange traded derivatives.
    • The consultation paper follows article 23F of the UK BMR, which requires the FCA to publish relevant Statements of Policy before powers are exercised.
    • A key proposal is the consideration about the scale and nature of legacy contracts that do not have adequate provisions to deal with a prohibition on use.
    • A second consideration the FCA proposes is whether and to what degree it is feasible for parties to amend these contracts in a way that delivers fair outcomes, a critical result in light of consumer protection and financial stability.
  • On Thursday May 20th the Bank of England published a consultation paper about how this central bank proposes to modify the scope of contracts which are subject to the derivatives clearing obligation to reflect the ongoing reforms to interest rate benchmarks.
    • In short, as a consequence of the anticipated changes in market activity resulting from interest rate benchmark reform, the Bank intends to remove contracts that reference benchmarks that are being discontinued and replace them with Overnight Index Swaps (OIS), with the same range of maturities, which reference the replacement near risk-free reference rate (RFR) benchmarks selected for each currency.
      On Thursday May 20th the FSC CIS group discussed risks to financial stability, of which the progress in phasing out LIBOR was the last topic.
  • On Friday May 21st the ARRC announced it selected CME Group as the administrator that it plans to recommend for a forward-looking Secured Overnight Financing Rate (SOFR) term rate, once market indicators for the term rate are met.
    • CME Group’s term SOFR reference rates can be found here.
    • Access to the data can be found via CME’s data platform, via Bloomberg (SR1M Index <GO>, SR2M Index <GO> and SR6M Index <GO>) and via Refinitiv (TWRZ50, TVRZ50 and TZRZ50, respectively for the 1, 3 and 6 month tenors.
  • Earlier this month the UK working group on risk-free reference rates issued a statement regarding the successor rate to GBP LIBOR for fallbacks in bond documentation that envisage the selection of a recommended successor rate.
    • In light of this, the Working Group recommends the use of overnight SONIA, compounded in arrears.
    • Details on conventions should be left to the issuer on a case-by-case basis.
  • On Monday May 24th ISDA published a paper about the role of financial markets and institutions in supporting the global economy during the pandemic. Well-capitalized banks, good liquidity, robust risk management and better counterparty risk management in combination with a more resilient market infrastructure played an important role.