The FCA has published a Statement encouraging market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA on 2 March 2020.
The change is intended to move the greater part of new sterling swaps trading to SONIA and reduce the risks from creating new LIBOR exposures. It 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.
See also our article on this issue.