FCA Warns Firms Need to Accelerate LIBOR Transition Prep

The Financial Conduct Authority (FCA) has warned firms that although good progress has been made in preparing for the LIBOR transition, firms still need to accelerate their efforts to ensure they are prepared for the benchmark’s cessation by the end of 2021.

In order to help firms be ready for the 2021 deadline, the Working Group on Sterling Risk-Free Reference Rates (RFRWG) has published its priorities and an updated roadmap for the year ahead of this Thursday.

The main recommendations from the RFRWG are:

• Ceasing issuance of cash products linked to sterling LIBOR by end-Q3 2020;
• Throughout 2020, taking steps that demonstrate that compounded SONIA is easily accessible and usable;
• Take steps to enable a further shift of volumes from LIBOR to SONIA in derivative markets;
• Establishing a framework for the transition of legacy LIBOR products, in order to significantly reduce the stock of LIBOR referencing contracts by Q1 2021; and
• Considering how best to address issues ‘tough legacy’ contracts.

In the statement published by the UK regulator today, Tushar Morzaria, Chair, Working Group on Sterling Risk-Free Reference Rates, said: “2020 will be a pivotal year in the transition journey, with critical focus on enabling the flow of new business away from sterling LIBOR."

“The Working Group on Sterling Risk-Free Reference Rates has therefore defined a key priority to cease issuance of sterling LIBOR cash products by the end of Q3. In conjunction, the RFRWG fully supports the Bank of England and FCA initiative to encourage Market Makers Market Makers Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Read this Term to change the market convention for sterling interest rate Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term from LIBOR to SONIA in Q1 2020.”

FCA and BoE release recommendations

The FCA and the Bank of England (BoE) have also both published a statement today encouraging market makers to change the convention for sterling interest rate swaps from LIBOR to SONIA on the 2nd of March 2020. According to the statement, this is in order to help progress the transition in the derivatives.

Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, said in the statement: “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.”