In a statement made on September 29, 2020, the Financial Conduct Authority (FCA) and Bank of England endorsed a proposal by the Working Group on Sterling Risk-Free Reference Rates (the Working Group) that the interdealer quoting convention should change such that prices be linked to SONIA, rather than LIBOR. This change was originally to be implemented from March 2, 2020, but has been delayed due to the COVID-19 pandemic.

This shift is expected to boost liquidity in SONIA-linked swaps, which will aid market participants in achieving the Working Group’s key milestone of ceasing initiation of new GBP LIBOR-linked linear derivatives expiring after 2021 by the end of Q1 2021. The proposal follows an FCA survey in which 95% of respondents answered ‘Yes’ to the question of whether a such a convention switch should be attempted.

In practice, this change would mean that interdealer brokers would change their primary basis for constructing interest rate swaps from GBP LIBOR to SONIA. This would mean that future LIBOR-linked swaps would be priced by reference to SONIA-linked swaps and then adjusted on a LIBOR-SONIA basis (under the current convention, SONIA-linked swaps are priced by reference to LIBOR-linked swaps, and then adjusted).

Please contact any of the authors of this article or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.