UK regulators push for March 2020 switch from LIBOR to SONIA for sterling interest rate swaps

The Financial Conduct Authority (FCA) and the Bank of England (BoE) today issued an announcement for market makers regarding the appropriate date for switching from LIBOR to SONIA.

The regulators encourage market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA in the first quarter of 2020. This change aims to move the greater part of new sterling swaps trading to SONIA and minimize the risks from creating new LIBOR exposures.

Following FCA discussions with market makers, the authorities have identified March 2, 2020 as an appropriate date for this change to be implemented.

The market for SONIA derivatives is already well-established, the FCA explains. Average cleared over-the-counter SONIA swaps surpassed £4.5 trillion per month over the past six months, and the traded monthly notional value is now broadly equivalent to Sterling LIBOR.

This change is also reflected in the roadmap set out by the Working Group on Sterling Risk-Free Reference Rates (‘the Working Group’). In addition to shifting the swap market convention, the roadmap details other priorities set by the Working Group, including ceasing GBP issuance of LIBOR-based loans by third-quarter 2020 and managing down legacy LIBOR-linked swap portfolios and exposures.

SONIA derivatives are likely to be the appropriate market convention for most contracts, particularly those maturing after 2021. The number of cases where LIBOR contracts are judged to remain appropriate is limited today, and will reduce further as the end of 2021 approaches. Market participants should be aware of the risks if new LIBOR transactions are entered into, and take appropriate steps to establish that their clients are too.

Commenting on this initiative, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, said:

’We have seen great progress in the development of the SONIA derivatives market. I encourage all market participants to join the initiative to put SONIA first over LIBOR from 2 March. This should help make SONIA the market standard in sterling swaps as is already the case in the bond market.’

Back in November 2019, Mr Latter admitted that the FCA does not know precisely how the LIBOR ‘end-game’ will play out. It may be that for all 35 LIBOR currency-tenor pairs a final cessation date can be announced comfortably in advance, and transition away from each of these rates can be substantially completed in an orderly manner before then.

The FCA has warned that firms must not assume LIBOR will continue beyond end-2021 even if transition is not substantially complete. If LIBOR becomes unrepresentative, this would be an irreversible step towards the end of panel bank LIBOR. The FCA does not plan to compel banks to join or rejoin LIBOR panels after end-2021.