Bank of England Turns Up Heat on LIBOR Transition and Raises Prospect of Higher Collateral Discounts for Secured Borrowings
In remarks at today’s Benchmark Strategies Forum in London, organized by the International Swaps and Derivatives Association and the Asset Management Group of the Securities and Financial Markets Association, Andrew Hauser, executive director for Markets of the Bank of England (BoE), stated, using some car racing analogies and omitting some details, which are noted in the footnotes in the transcript (emphasis added):
2020 is a critical year for LIBOR transition.
Great progress was made in 2019, particularly in sterling wholesale markets – and I want to give special thanks to the part that ISDA’s support and leadership has played in that.
But, with the finish line for LIBOR now clearly in view, there is still a lot of ground to cover – particularly in the cash markets. We need to see another decisive acceleration in effort in 2020 to ensure risk-free rates are adopted across the full range of sterling business, and LIBOR is left behind for good.
The increased focus and energy from sterling market participants this year is palpable. But they cannot run this race alone. As track marshals and safety officials, the Bank of England and FCA [Financial Conduct Authority] also have important roles to play – and we are using all the tools at our disposal in that quest.
Understandably, perhaps, focus often alights on the ‘sticks’ we can wield. And it’s true that the regulatory authorities have stressed that firms’ boards and executives must take ownership of the transition and its key milestones, through ‘Dear CEO’ and ‘Dear Senior Manager’ letters, and through direct supervisory engagement.
The FCA has set out how it will exercise its powers of life and death over LIBOR, including the critical judgment on representativeness. And the Bank’s Financial Policy Committee (FPC) has said that it will consider using other policy and supervisory tools to encourage transition if progress is too slow.
And after reviewing recent BoE and other official action regarding LIBOR, Mr. Hauser continued (emphasis added):
It is in that spirit that I want today to announce two new initiatives aimed at further supporting LIBOR transition:
- First, and in direct response to feedback from market practitioners, the Bank is intending to publish a compounded SONIA index from July 2020. Complementing our existing overnight SONIA rate, the index will provide a flexible tool to help market participants construct compounded SONIA rates in an easy and consistent way, supporting achievement of their 2020 Q3 target for new issuance.
- The second relates to the Bank’s own lending operations for banks and other financial intermediaries. From October this year, we will begin increasing haircuts progressively on LIBOR-linked collateral we lend against. This will give firms the time they need to replace that collateral with risk free rate alternatives, ensuring their borrowing capacity is maintained while also protecting public funds. This approach reflects the clear preferences of respondents to our discussion paper last year.
These initiatives are aimed at turbo-charging sterling transition, helping the market deliver against its commitment to transition away from LIBOR and further de-risking sterling markets.
These remarks certainly suggest a higher order of regulatory engagement and move beyond prior encouragement and requests for LIBOR transition plans. We anticipate similar actions from other international regulators over time as the deadline for LIBOR cessation comes closer and inadequate (or perceived inadequate) market response continues.
