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LIBOR: the countdown to 2021
LIBOR: the countdown
to 2021
By the side of business
Helping business understand and prepare for the phasing out of LIBOR beyond 2021
September 2019
LIBOR: the countdown to 2021 LIBOR: the countdown to 2021LIBOR: the countdown to 2021
Overview
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Introduction The future of LIBOR (London Interbank Offered Rate) has been a major discussion topic since Andrew Bailey’s speech in July 20171, where he announced that it was the Financial Conduct Authority’s (FCA’s) intention that it would no longer be necessary for it to use its powers to persuade or compel the panel of banks that contribute LIBOR quotes to do so beyond the end of 2021. This has led to significant activity amongst certain market participants and industry bodies, with working groups set up in the UK and globally to assess the implications of moving to alternative benchmarks. Following on from this speech, Andrew Bailey provided further updates in July 20182 and July 20193, where he further underlined the need for markets to transition away from LIBOR.
In connection with this, the FCA and Prudential Regulation Authority (PRA) wrote (in September 2018) to the CEOs of major banks and insurers supervised in the UK asking for the preparations and actions they are taking to manage transition from LIBOR to alternative interest rate benchmarks.
The market LIBOR seeks to measure is no longer sufficiently active. Engagement will be needed from participants across all relevant sectors and markets to transition away from LIBOR.
1 Andrew Bailey, The future of LIBOR (7 July 2017), available at https://www.fca.org.uk/news/speeches/the-future-of-libor2 Andrew Bailey, Interest rate benchmark reform: transition to a world without LIBOR, available at https://www.fca.org.uk/news/speeches/
interest-rate-benchmark-reform-transition-world-without-libor3 Andrew Bailey, LIBOR: Preparing for the end available at https://www.fca.org.uk/news/speeches/libor-preparing-end4 Dear CEO letter, available at https://www.fca.org.uk/news/statements/dear-ceo-libor-letter5 Last Orders Calling Time on LIBOR event, available at https://www.bankofengland.co.uk/events/2019/june/last-orders-calling-time-on-libor 6 ICE LIBOR methodology, available at https://www.theice.com/publicdocs/ICE_LIBOR_Methodology.pdf
Whilst the letters were sent to the largest banks and insurers in the first instance, the FCA and PRA are encouraging all firms that currently rely on LIBOR to read and reflect on the letter. It is likely that these letters will be a further catalyst for the acceleration of market transition activities4.
On 5th June 20195 the Bank of England, FCA and the Working Group on Sterling Risk Free Reference Rates jointly held a conference on work underway to transition from LIBOR to alternative risk-free interest rates.
This introductory paper summarises some of the key issues being considered, and activities being undertaken, as financial and capital market participants prepare for the potential cessation of LIBOR beyond the end of 2021. A glossary of key terms is provided at the end of the paper.
It is still too early for any consensus to have emerged on how the transition from LIBOR and other Interbank Offered Rates (IBORs) to alternative benchmarks will be managed. However, at Lloyds Bank, we recognise these changes have important implications for many of our clients.
We will continue to engage with clients on market developments and we welcome your feedback. Please feel free to discuss any thoughts or concerns with your Relationship Manager.
What is LIBOR? LIBOR publication dates back to at least 1986 and since then it has grown to become a global benchmark interest rate for financial products.
Currently, a reference panel of between 11 and 16 contributor banks for each LIBOR currency (GBP, EUR, USD, JPY, CHF) submit daily interest rates for various periods up to 12 months. LIBOR is then calculated and published for each relevant currency and tenor using a trimmed arithmetic mean of the submitted rates.
Contributing banks are required to formulate submissions in accordance with the methodology requirements6 published by ICE Benchmark Administration (IBA). The process is administered by the IBA and LIBOR has been designated as a Critical Benchmark under recently formed EU Benchmarks Regulation. Other important IBORs are EURIBOR (Euro Interbank Offered Rate) and TIBOR (Tokyo Interbank Offered Rate).
Why is LIBOR likely to be phased out? In July 2017 the FCA announced that it was its intention that it would no longer be necessary for it “to persuade, or compel, banks to submit to LIBOR” or “to sustain the benchmark through our influence or legal powers” after the end of 2021. In his speech
LIBOR: the countdown to 2021 LIBOR: the countdown to 2021
* These recommendations will help develop alternatives for LIBOR over time.
Industry body / organisation deciding alternative rate
(Near) RFR recommendation*
Working Group on Sterling RFR set up by BoE
SONIA, an unsecured overnight rate calculated by the Bank of England from eligible transactions reported to them via their sterling money market daily data collection process in accordance with form “SMMD”. Reformed SONIA has been published since April 2018
Working Group on RFR for the Euro Area, formed by FSMA, ESMA, ECB and the European Commission
The ECB announced on the 13th September 2018 that the private sector working group had recommended €STR as the alternative Euro risk-free rate. €STR reflects wholesale Euro unsecured overnight borrowing costs of Euro area banks and is expected to be published from 2nd October 2019
Alternative Reference Rates Committee, convened by the Federal Reserve
SOFR, a new, broad US Treasuries repo financing rate published since April 2018
Study Group on RFR TONAR (Tokyo Overnight Average Rate), an uncollateralised overnight call rate
The National Working Group on CHF Reference Rates (NWG)
SARON (Swiss Average Rate Overnight), which references actual market transactions in the Swiss Franc interbank repo market (i.e. secured)
Alternative benchmark rates developed for all 5 LIBOR currencies
Andrew Bailey, the CEO of the FCA, stated “the underlying market that LIBOR seeks to measure – the market for unsecured wholesale term lending to banks – is no longer sufficiently active”.
The FCA also announced in November 20177
that all current panel banks have agreed to continue with LIBOR contributions until the end of 2021. This is intended to allow sufficient time for a market-led solution to LIBOR transition to be developed and implemented.
The announcements have provided greater impetus for regulators and market participants to accelerate thinking about alternative benchmark rates and the implications of LIBOR and other IBORs potentially ceasing to exist. This has been further reinforced by Andrew Bailey’s speeches in July 2018 and July 2019, and other speeches from the FCA, strongly encouraging market participants not to rely on LIBOR’s continuation beyond 2021, and to make plans for transition.
Why would LIBOR cessation be a big deal? It is widely acknowledged that LIBOR is a key interest rate benchmark for hundreds of trillions of dollars in financial products and contracts worldwide, including corporate loans, derivatives, corporate bonds/FRNs, structured debt products, deposits and mortgages. It also plays a central role for many banks’ internal funding benchmarks and Insurer Solvency II balance sheets.
Where existing contracts run into 2022 and beyond, market participants will likely need to deploy resources to review and amend documentation in order to confirm suitable replacements to LIBOR as the reference rate, depending on the outcome of a market-led solution.
For new contracts entered into before 2022, market participants will need to employ appropriate fall-back provisions in documentation in the absence of specific replacement benchmark rates.
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An international effort Since 2014 a number of countries have set up working groups to identify near-Risk Free Reference Rates (RFRs) as part of a G20 initiative, delegated to the Financial Stability Board (FSB), to review and reform critical benchmark rates. The FSB established an Official Sector Steering Group (OSSG), to focus the FSB’s work on the most fundamental interest rate benchmarks.
Each of the RFRs chosen as potential alternatives to LIBOR brings its own challenges. For instance, some are based on secured and others on unsecured transactions. There is also presently a lack of liquidity in some of the markets referencing these benchmarks (where they exist) and none of the solutions identified so far offers a term structure similar to LIBOR. In fact they are all overnight rates, whereas LIBOR tenors go out to one
7 FCA Statement published 24 November 2017, available at https://www.fca.org.uk/news/statements/fca-statement-libor-panels
8 ECB Press Release, 14 March 2019, available at https://www.ecb.europa.eu/press/pr/date/2018/html/ecb.pr180913.en.html9 Private Sector Working Group recommends ESTER as Euro risk-free rate, available at https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.
pr190314_1~af10eb740e.en.html10 EMMI blueprint for the hybrid methodology for the determination of EURIBOR https://www.emmi-benchmarks.eu/assets/files/D0034A-2019%20Euribor%20
Hybrid%20Methodology_2019_02_12.pdf11 BoE SONIA Key features and policies, available at https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/sonia-key-features-and-policies
year, with 3 month and 6 month tenors, in particular, being extensively used in derivative and loan / bond markets.
Different countries are at different stages of preparedness for transitioning to an alternative benchmark. In the UK, there already exists a relatively liquid Sterling Overnight Index Average (SONIA) swap market. The US only started publishing Secured Overnight Financing Rate (SOFR) in April 2018 which was followed by the launch of a futures market. A swap market exists but has been slower to take off. The Alternative Reference Rates Committee (ARRC) in the US has published a paced transition plan with key milestones to transition away from USD LIBOR by the end of 2021. It has also instituted weekly calls to brief the market and take questions as long as there is sufficient interest.
In the Eurozone, the phasing out of EURIBOR is running at a slower pace than LIBOR. The Euro Short-Term Rate8 (€STR) is due to be published from 2nd October 2019. The EU Benchmark Regulation (BMR) is being amended to allow regulators to compel submitters to critical benchmarks to continue to submit rates for a period of 5 years if they wish to withdraw from the panel of submitting banks (extended from 2 years currently). The calculation methodology for both the Euro Overnight Index Average (EONIA) and EURIBOR will also be changing. From 2nd October 2019 EONIA (often referenced in EUR collateralised derivative contracts) will simply be quoted as €STR plus a fixed spread of 8.5 basis points, published on a T+1 basis and is likely to continue until end 20219. EURIBOR will be following a similar hybrid methodology10 as adopted by the IBA for LIBOR, this is being implemented on a phased approach during 2019.
What is the Bank of England doing to aid LIBOR transition? The Bank of England (BoE) has initiated a working group on Sterling RFR (the ‘working group’), which has recommended a reformed SONIA as the preferred Sterling RFR as an alternative to GBP LIBOR. The BoE define SONIA as “a measure of the rate at which interest is paid on sterling short-term wholesale funds in circumstances where the credit, liquidity and other risks are minimal”11. The working group has identified that active engagement will be needed from participants across all relevant sectors and markets to transition away from LIBOR. As a result, a number of sub-working groups have been set up, each with a different industry and product focus.
The working group is publishing a monthly newsletter with key news relating to RFR transition in GBP markets and others.
Sterling RFR Working Groups
The ACT / LMA and other trade bodies are represented at a cross section of the
below groups and forums.
Working Group on Sterling RFRs
The Working Group on Sterling RFRs is actively engaged with each of the other
currency working groups and with the FSB’s OSSG on benchmark reform.
Stakeholder Forums
Investment Managers
Non-financial Corporates
Banking Industry
Technical Sub Groups
Cross-currency swaps (international)
Bond Markets
Term SONIA Reference Rates
Communications & Outreach
Loan Markets
Market Infrastructure
Pension Funds and Insurance Companies
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LIBOR: the countdown to 2021 LIBOR: the countdown to 2021
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Lloyds Banking Group is represented on the Working Group on Sterling RFR, which was initiated to assist the BoE in meeting its objective of developing sterling RFRs. It is also active on a number of the BoE facilitated industry-wide sub-groups that have been set up, including the Loan Markets, Bond and Infrastructure sub-groups and Term Sonia Task Force.
Lloyds Bank is preparing itself for IBOR transition, with the primary objective to position the Group for, and engage with clients on, the consequences of potential cessation of LIBOR, and other IBORs, and commence transition work to alternative benchmarks.
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Lloyds Bank will continue to engage with clients on market developments. In the meantime we recommend clients raise awareness internally of changes that may be coming and keep abreast of future developments.
Lloyds Bank is active in Sterling swaps referencing both LIBOR and SONIA and has been facilitating transitions to SONIA for some clients.
How is Lloyds Banking Group preparing for the transition away from LIBOR and other IBORs?
In September 2018 Lloyds Bank plc became the first UK Retail and Commercial lender to price a bond using SONIA as its reference rate. It launched the first securitisation referencing SONIA in December 2018.
In the UK, reformed SONIA has been selected as the Sterling near-RFR. However, there are a number of challenges to overcome in transitioning away from LIBOR.
Fall-back provisions Most financial instrument documents include provisions to guide how the interest rates would be set if LIBOR is no longer available for example in a contingency event such as IT failure. However, these were designed to address temporary and not permanent disruptions in relation to LIBOR and are therefore unlikely to provide a long- term solution.
Industry groups such as the International Swaps and Derivatives Association (ISDA) and Loan Market Association (LMA) have been reviewing their respective fall-back provisions. ISDA has established a working group to identify and implement new fall-back provisions for certain key IBORs if they are discontinued. In 2018 they launched a consultation which revealed a market preference for a fall-back to a RFR “compounded set in arrears” calculation with a “historic mean/median” spread adjustment for legacy contracts12. The look-back period for the mean/median calculation has not been determined although initial responses express a preference for a period which excludes the volatility seen during the financial crisis. A supplemental consultation was launched in May 2019 for USD LIBOR and in time will be launched for EURIBOR. In July 201913 ISDA announced that Bloomberg Index Services Limited has been selected to calculate and publish adjustments related to
Transition Challenges: Key Areas of Debate
12 ISDA Press Release, 20 December 2018, available at https://www.isda.org/2018/12/20/isda-publishes-final-results-of-benchmark-fallback-consultation/13 ISDA Press Release 31 July 2019 https://www.isda.org/2019/07/31/bloomberg-selected-as-fallback-adjustment-vendor/14 https://www.isda.org/a/Ua0TE/Consultation-on-Parameters-for-Fallback-Adjustments.pdf15 LMA publishes revised Replacement of Screen rate clause to provide further flexibility in light of uncertainty over the future of LIBOR,
available at http://www.lma.eu.com/libor16 Edwin Schooling Latter, LIBOR transition and contractual fallbacks, available at https://www.fca.org.uk/news/speeches/libor-transition-and-contractual-fallbacks 17 Preliminary Results of ISDA Pre-cessation Issues Consultation, available at https://www.isda.org/a/z4hME/Public-Statement-Preliminary-Summary-of-Feedback-to-Pre-
Cessation-Consultation-Clean.pdf
fall-backs that ISDA intends to implement for certain interest rate benchmarks in its 2006 ISDA Definitions.
In September 2019 ISDA launched14 a final consultation on parameters for the spread a adjustments with two primary options under consideration. A median lookback over a five year period from the date of announcement/publication of information regarding cessation. The second option looks at a trimmed mean over a ten year lookback period from the date of announcement/publication of information regarding cessation.
For adhering parties, ISDA has a protocol system for amending legacy contracts which may allow for a more streamlined process in some cases, though not all entities use protocols and not all derivatives will be documented under ISDA.
LMA is also reviewing its fall-back provisions: it currently provides optional wording for new contracts, allowing for a replacement benchmark in case of an unforeseen event, where the screen rate is unavailable, or more recently, anticipating uncertainty over the future of LIBOR, if a replacement benchmark is adopted, with the consent of the borrower group and majority lenders (instead of requiring all-lender consent15). No matter whether majority or all-lender consent is required, it is likely to be operationally burdensome to make a change, as each individual loan agreement would need to be amended.
Bilateral renegotiations are more difficult in the public bond market and fall-backs
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may require additional consideration. In the US, the ARRC has discussed potentially approaching the state of New York to seek a legislative release which would clarify the fall-back mechanism if LIBOR is no longer published and avoid widespread disruption to the market.
In January 2019, Edwin Schooling Latter from the FCA delivered a speech highlighting contractual fall-backs and the need for market participants to focus on these ahead of any potential cessation of LIBOR16. He speculates on how LIBOR may eventually end. For example, following the departure of one or more panel banks, the Regulator may determine a benchmark is no longer representative of the underlying market, and suggests this may be a suitable fall-back trigger. However, he goes on to state “The best and smoothest transition from LIBOR will be one in which contracts that reference LIBOR are replaced and amended before fall-back provisions are triggered”. In line with expectations from the Official Sector (e.g. Regulators and Central Banks) the market needs to consider, prepare and agree alternatives for an orderly transition. In connection with this ISDA launched a consultation in May 2019. The consultation related to pre-cessation issues, and sought comment on how derivatives contracts should address a regulatory announcement that LIBOR or certain other IBORs categorised as critical benchmarks under the EU Benchmarks Regulation are no longer representative of an underlying market. Preliminary results from this consultation were published in August 201917.
LIBOR: the countdown to 2021 LIBOR: the countdown to 2021
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19 Consultation on Term SONIA rates, available at https://www.bankofengland.co.uk/paper/2018/consultation-paper-on-term-sonia-reference-rates20 Summary of responses to Term SONIA consultation, available at https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/term
-sonia-referencerates-consultation-summary-of-responses.pdf 21 Working Group on Sterling Risk-Free Rate progress update, available at https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/statement-on-
theprogress-on-adoption-of-risk-free-rates-in-sterling-markets.pdf22 A User’s Guide to SOFR, April 2019, available at https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf23 IBOR Reform and its Effects on Financial Reporting, Staff Paper, March 2019, available at https://www.ifrs.org/-/media/feature/meetings/2019/march/iasb/
ap14a-iborreform-and-the-effects-of-financial-reporting.pdf24 New issuance of Sterling bonds referencing Libor, available at https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/risk-free-reference-
ratesnew-issuance-of-sterling-bonds-referencing-libor.pdf25 Discussion Paper: Conventions for referencing SONIA in new contracts, available at https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/
discussion-paper-conventions-for-referencing-sonia-in-new-contracts.pdf26 Summary from the Working Group and responses to the consultation https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/statement-and
summary-of-responses-to-sonia-conventions-discussion-paper.pdf27 Working Group on Sterling RFR Roadmap https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/roadmap.pdf
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Considerations in derivative markets The ISDA working group has considered fall-backs for LIBOR to an adjusted RFR plus spread adjustment. Proposals for an adjusted RFR are measured against the following criteria: (1) simplicity and ease of calculating; (2) data requirements; and (3) similarity with the structure of Overnight Index Swaps (OIS). Proposals for a spread adjustment are measured against the following criteria: (1) eliminating or minimising value transfer; (2) eliminating or minimising any potential for manipulation; and (3) eliminating or mitigating against the impact of market disruption at the time the fall-back is applied. Even a simple change such as referencing daily compounding SONIA plus x bps instead of LIBOR may result in some value transfer due to changes in market value following a change in the benchmark interest rate. The ISDA consultation discusses this topic and looks at various options.
There may also be accounting and tax issues, as many corporates use LIBOR as the RFR for derivative valuation purposes. Some participants in the pensions Liability Driven Investment (LDI) market that tend to transact collateralised swaps see some benefit in transitioning sooner rather than later to
from SONIA and in July 2018 they launched a consultation on Term SONIA rates19. The consultation acknowledges the need in some areas of the market for a forward looking term SONIA reference rate. In November 2018 they announced a summary of responses to the consultation20. In May 2019 three potential Term SONIA benchmark administrators presented their proposals for a Term SONIA rate to the RFR Working Group, also in May 2019 the working group provided a progress update21. Any vulnerability resulting from relying on another quoted market must be considered and Term SONIA may just be a stop-gap measure, rather than a long term solution, as the market gets used to using a daily compounding SONIA. In his July 2019 speech the FCA’s Andrew Bailey said “I cannot guarantee that these efforts to produce term rates will be successful, or the precise timing of their arrival” and cautioned that “we think that any firms still delaying transition until term rates arrive are making a mistake”.
In an encouraging development the first daily compounding SONIA loan was announced in June 2019 which may be a catalyst for further volumes.
In the US the ARRC published a User’s Guide to SOFR, the document includes information on a potential Term SOFR22.
A further consideration is if the swap market changes in a different way to the loan and bond markets, as this could give rise to basis risk and volatility in P&L for hedge accounting packages. The International Accounting Standards Board (IASB) is currently discussing recommended treatment for existing hedge accounting. The Board recently approved recommendations to allow the continuance of hedge accounting for LIBOR-linked products but a decision will not be confirmed until late 201923. The IASB will
Other important considerations include: changes to new documentation, transitioning to successor rates and amending existing documentation (including amending in accordance with existing requirements), the inclusion of fall-back provisions and the potential for divergence in terms of approaches given the bespoke nature of deals and documents. The process for transitioning to alternative rates and the practical implications, including potential systems changes, are also key considerations.
What next? In his July 2018 speech, Andrew Bailey said: “The discontinuation of LIBOR should not be considered a remote possibility” and “the biggest obstacle to a smooth transition is inertia – a hope that LIBOR will continue, or that work on transition can be delayed or ignored. Misplaced confidence is a risk to financial stability as well as to individual firms.”
In the first instance, firms are encouraged to review existing LIBOR exposures and fall-backs, paying particular attention to those which mature after 2021. This review could include the creation of an overall inventory of products and systems used to capture such exposures. Firms are encouraged to transition rather than rely on fall-backs, and if Term SONIA is published or the market adopts alternative solutions (as seen in the bond markets) and once the ISDA consultation process is complete, we expect transition to alternative benchmarks to accelerate. Firms should also consider the timeline27 published by the Working Group on Sterling Risk-Free Rates which shows a target date of Q3 2020 by which time GBP issuance of LIBOR-based product with a maturity date beyond 2021 has ceased.
18 BCBS/IOSCO Press Release, 5 March 2019, available at https://www.bis.org/press/p190305a.htm
then consider issues arising once the IBOR has undergone reform.
There needs to be a high degree of cooperation across the various sub-groups established by the BoE and market sectors as well as coordination across IBOR jurisdictions. The Working Group on Sterling Risk-Free Reference Rates published a paper24 setting out some of the market uncertainties surrounding issuance of bonds referencing LIBOR that mature beyond 2021.
A number of firms (mostly banks) have issued bonds referencing RFRs. To overcome cashflow challenges, bond issuers have adopted mechanisms to smooth the settlement process. In SONIA referencing bonds we have seen the Interest Determination Date set five days in advance of the interest payment date, enabling market participants sufficient time for calculation of cash flow and settlement. In the US, we have seen a slightly different approach for bonds that reference SOFR. Initially bonds have typically used a daily averaging interest calculation method and lockout period, where instead of a lag, the same interest rate fixing is assumed for the final few days of the interest period (initially four, or more recently, two days). More recent SOFR issuances have utilised the SONIA lookback method with coupons paid on a daily compounding basis. These conventions in SONIA and SOFR may still evolve and harmonise. A discussion paper exploring these conventions in the sterling market and inviting feedback was issued in March 201925 and in August 2019 responses to the consultation were published26. Similarly in the US, the ARRC have produced a number of papers including a SOFR conventions guide. These materials can be located on the ARRC website https://www.newyorkfed.org/arrc.
SONIA-based swaps. For those participants, their derivatives are already typically valued off a SONIA curve and therefore some see an advantage to moving to SONIA-based swaps if there is sufficient liquidity in the OIS market.
Changes to collateralised derivatives may be caught by EMIR regulation relating to clearing. The Basel Committee on Banking Supervision and the International Organization of Securities Commissions have released a statement advising that amendments to legacy derivative contracts in response to benchmark reforms do not require the application of margin requirements18. However, positions may differ under relevant implementing laws.
Considerations in loan and bond markets A key consideration for certain sectors in the loan and bond markets is retaining a forward-looking term structure in RFR as an alternative to LIBOR. One issue is that SONIA is an overnight rate, and backward looking, whereas some borrowers and lenders/investors have a preference for certainty of cash flow that can only be provided by a forward-looking measure. The Term SONIA sub-working group, and more recently the Term SONIA priority task force, has been looking into how a forward-looking rate can be constructed
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Awareness of benchmark transition needs to be raised. The market needs to consider, prepare and agree alternatives for an orderly transition.
LIBOR: the countdown to 2021 LIBOR: the countdown to 2021
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Phasing out LIBOR – timeline
The Working Group on Sterling Risk-Free Reference Rates announced SONIA as its preferred near risk-free interest rate benchmark (RFR) for use in sterling derivatives and relevant financial contracts
Most provisions of EU Benchmarks Regulation come into effect. LIBOR designated a Critical Benchmark
SOFR published and SOFR futures start to trade
ISDA launches consultation on implementation of fallbacks for IBORs
Fannie Mae and World Bank issue SOFR-linked bonds
National Express is first company to publically announce it has entered into a SONIA loan facility
EU Benchmark Regulation (BMR) amended to allow regulators to compel submitters for up to 5 years
Associated British Ports announce consent solicitation to amend an existing FRN from £ LIBOR to SONIA
ISDA launches consultation on pre-cessation issues for LIBOR
€STR selected as EUR RFR
ARRC launches fallback consultation: FRNs / loans
EURIBOR added to the ESMA benchmark register as BMR compliant
Andrew Bailey questions the sustainability of LIBOR in speech to Bloomberg
Panel Banks agree to continue LIBOR contributions until end 2021
Reformed SONIA first published by BoE in April 2018
SONIA futures are traded
LMA Replacement of Screen Rate update
One year after his first speech Andrew Bailey reinforces message that market should not rely on LIBOR’s continuation beyond 2021
Working Group on RFRs publishes Discussion Paper on conventions for referencing SONIA in new contracts
Working Group on RFRs launches consultation on Term SONIA
Working Group on RFRs invites views on TSRRs from benchmark administrators
EIB (Jun) and Lloyds Bank (Sep) issue SONIA-linked bonds
PRA/FCA Dear CEO Letter
H1 2020 Publication of Term SONIA may start
H2 Liquidity in derivatives referencing SONIA may start to exceed liquidity in derivatives referencing £ LIBOR
*LIBOR ceases?
2017 2018 2019 2020 - 2021
2020* Transition from LIBOR across all markets
Glossary
ACT: Association of Corporate Treasurers
BCBS: Basel Committee on Banking Supervision
BOE: Bank of England
BMR: EU Benchmark Regulation
ECB: European Central Bank
EONIA: Euro Overnight Index Average
ESMA: European Securities and Markets Authority
€STR: Euro Short-term Rate
EURIBOR: Euro Interbank Offered Rate
FCA: Financial Conduct Authority
FRNs: Floating Rate Notes
FSB: Financial Stability Board
FSMA: Financial Services and Markets Authority
G20: Group of 19 individual countries plus the European Union
IBORs: Interbank Offered Rates
ICE: Intercontinental Exchange
ICE BA: ICE Benchmark Administration Ltd
IOSCO: International Organization of Securities Commissions
ISDA: International Swaps and Derivatives Association
LDI: Liability Driven Investment
LIBOR: London Interbank Offered Rate
LMA: Loan Market Association
NWG: National Working Group
OIS: Overnight Indexed Swap
OSSG: Official Sector Steering Group
P&L: Profit and Loss
PRA: Prudential Regulation Authority
RFR: Risk Free Reference Rate
SARON: Swiss Average Rate Overnight
SOFR: Secured Overnight Financing Rate
SONIA: Sterling Overnight Index Average
TONAR: Tokyo Overnight Average Rate
TSRR: Term SONIA Reference Rate
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LIBOR: the countdown to 2021
CONTRIBUTORS
ALBERT SHAMASH
Managing Director, Business Development and Innovation, Financial Institutions
Lloyds Bank
STEVE BULLOCK
Head of Benchmark Submission and Supervision, Group Corporate Treasury
Lloyds Bank
UK
International
H2: ISDA’s fallback for IBORs likely to be agreed
H2: €STR published from 2nd October 2019. EONIA set to €STR + 8.5bps and will be published until the end of 2021
LIBOR: the countdown to 2021Please contact us if you would like this information in an alternative format such as Braille, large print or audio. Calls may be monitored or recorded in case we need to check we have carried out your instructions correctly and to help improve our quality of service. Please note that any data sent via e-mail is not secure and could be read by others.
IMPORTANT INFORMATIONThis document has been prepared for information purposes only and must not be distributed, in whole or in part, to any person without the prior consent of Lloyds Bank plc (together with its affiliates, “Lloyds Bank”). This document should be regarded as a marketing communication, it is not intended to be investment research and has not been prepared in accordance with legal requirements to promote the independence of investment research and should not necessarily be considered objective or unbiased. This document is not independent from Lloyds Bank’s proprietary interests, which may conflict with your interests. The authors of this document may know the nature of Lloyds Bank’s proprietary interests or strategies; Lloyds Bank may engage in transactions in a manner inconsistent with the views expressed in this document; and Lloyds Bank’s salespeople, traders and other professionals may provide oral or written market commentary or strategies to clients which may conflict with the opinions expressed in this document. Securities services offered in the United States are offered by Lloyds Securities Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority.
Any views, opinions or forecast expressed in this document represent the views or opinions of the author and are not intended to be, and should not be viewed as advice or a recommendation. Lloyds Bank makes no representation and gives no advice in respect of legal, regulatory, tax or accounting matters in any applicable jurisdiction. You should make your own independent evaluation, based on your own knowledge and experience and any professional advice which you may have sought, on the applicability and relevance of the information contained in this document.
The material contained in this document has been prepared on the basis of publicly available information believed to be reliable and whilst Lloyds Bank has exercised reasonable care in its preparation, no representation or warranty, as to the accuracy, reliability or completeness of the information, express or implied, is given. This document is current at the date of publication and the content is subject to change without notice. We do not accept any obligation to any recipient to update or correct this information. Lloyds Bank, its directors, officers and employees are not responsible and accept no liability for the impact of reliance on, or any decisions made based upon, the information, views, forecasts or opinion expressed.
Lloyds Banking Group plc and its subsidiaries may participate in benchmarks in any one or more of the following capacities; as administrator, submitter or user. Benchmarks may be referenced by Lloyds Banking Group plc for internal purposes or used to reference products, services or transactions which we provide or carry out with you. More information about Lloyds Banking Group plc’s participation in benchmarks is set out in the Benchmark Transparency Statement which is available on our website.
This document has been prepared by Lloyds Bank. Lloyds Bank is a trading name of Lloyds Bank plc, Bank of Scotland plc and Lloyds Bank Corporate Markets plc. Lloyds Bank plc. Registered Office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 2065. Bank of Scotland plc. Registered Office: The Mound, Edinburgh EH1 1YZ. Registered in Scotland no. SC327000. Lloyds Bank Corporate Markets plc. Registered office 25 Gresham Street, London EC2V 7HN. Registered in England and Wales no. 10399850. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration numbers 119278, 169628 and 763256 respectively.
Lloyds Bank Corporate Markets plc, Singapore Branch. Registered office 138 Market Street #21-01 Capitagreen, Singapore 048946. Registered in Singapore UEN: T18FC0067A. Licensed and regulated by the Monetary Authority of Singapore. Your contractual counterparty will be Lloyds Bank Corporate Markets plc if you enter into any product or transaction with us in Singapore.
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