UK lenders told to be ready to offer non-LIBOR linked products by end of Q3 2020

Maria Nikolova

It remains the central assumption that firms cannot rely on LIBOR being published after the end of 2021, the Working Group on Sterling Risk-Free Reference Rates says.

The UK Financial Conduct Authority (FCA) and the Bank of England have worked with members of the Working Group on Sterling Risk-Free Reference Rates (RFRWG) and its sub-groups and task forces to consider how all firms’ LIBOR transition plans may be affected by Coronavirus. It remains the central assumption that firms cannot rely on LIBOR being published after the end of 2021.

The regulators recognise the challenges presented by the current operating environment. But they have seen continued progress on LIBOR transition through this challenging period. This includes the first syndicated loan that will link to SONIA and SOFR, the first bilateral loan referencing SONIA in the social housing sector, and another successful consent solicitation to convert a legacy LIBOR referencing bond.

Within sterling cash markets, transition to SONIA in the bond market has been largely completed, the regulators note. In loan markets, lenders will continue work to make SONIA-based products available before the end of the third quarter of 2020, and some borrowers will be ready to take advantage of these alternative products before then.

Nevertheless, the RFRWG, the FCA and the Bank of England recognise that it will not be feasible to complete transition away from LIBOR across all new sterling LIBOR linked loans by the original end-Q3 2020 target. There will likely be continued use of LIBOR-referencing loan products into Q4 2020 in particular, to maintain the smooth flow of credit to the real economy.

The RFRWG recommends that:

  • By the end of Q3 2020 lenders should be in a position to offer non-LIBOR linked products to their customers;
  • After the end of Q3 2020 lenders, working with their borrowers, should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion ahead of end-2021, through pre-agreed conversion terms or an agreed process for renegotiation, to SONIA or other alternatives; and
  • All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.

The RFRWG agreed that progress can also continue to be made in other areas, and the FCA, the Bank of England and the Chair of the RFRWG will support the delivery of the RFRWG workplan in key areas that will continue the momentum on LIBOR transition. This includes, for instance, publishing the RFRWG’s analysis on, and considerations for, dealing with ‘tough legacy’ contracts.

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