FCA encourages firms to keep pursuing transition of legacy sterling LIBOR contracts
The Bank of England, the Financial Conduct Authority (FCA) and Working Group encourage firms to continue to pursue the active transition of legacy sterling LIBOR contracts currently using the temporary synthetic LIBOR. Transitioning these contracts to permanent robust alternatives remains the best way to retain control and economic certainty over existing agreements.
The FCA has been clear that synthetic LIBOR is a temporary bridge to RFRs, and its availability is not guaranteed beyond end-2022. The FCA must review its availability annually.
During the course of 2022, the FCA will seek views on retiring 1-month and 6-month synthetic sterling LIBOR at the end of 2022, and on when to retire 3-month sterling synthetic LIBOR.
The transition from US dollar LIBOR remains of critical importance globally, including in the UK where many firms are active in US dollar interest rate markets. To support the transition from US dollar LIBOR the FCA’s prohibition on its use in certain new contracts came into effect from the start of 2022, in line with US supervisory guidance.
UK supervised entities should no longer be using US dollar LIBOR in new contracts, with limited exceptions. The Bank of England, FCA and the Working Group encourage transition to robust alternative rates, such as SOFR. Supervisors will continue to monitor UK regulated entities’ progress in transition.
Overnight SONIA, compounded in arrears, is now fully embedded across sterling markets. Successful CCP conversion processes during December 2021 saw some of the largest single day amendments to financial contracts, with in excess of £13 trillion LIBOR-referencing contracts converted to SONIA. As a result, there are effectively no longer any sterling LIBOR linked cleared derivatives.
The implementation of ISDA’s IBOR Fallbacks saw a further reduction in the legacy stock of LIBOR-linked derivatives. In cash markets, SONIA floating rate note issuance since 2018 exceeds £120bn, and new SONIA lending exceeds £100bn across a diverse range of sectors and facility types.
The Bank of England now estimates that, across all asset types, less than 2% of the total sterling LIBOR legacy stock remains and notes that firms, as expected by the Bank of England and FCA, have plans to address this residual exposure.