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On March 26, 2021, the LMA published a note outlining considerations for market participants relating to the use of forward-looking term SONIA reference rates (Term SONIA Rates).

Term SONIA Rates have been available in beta form since July 2020, and available for use since 11 January 2021. Term SONIA Rates are expected to have limited use as the UK authorities have made clear their preference for the market to adopt a broad-based transition to SONIA compounded in arrears for new transactions, with use of Term SONIA Rates being more limited than the current use of LIBOR, and with SONIA compounded in arrears being seen by the Bank of England and FCA as the most robust and reliable replacement rate for LIBOR.  However, it is acknowledged that Term SONIA Rates may provide an option for loan transition for some parts of the loan market.Continue Reading LMA Publishes Note on the Use of Forward-Looking Term SONIA Reference Rates

As the end of Q1 2021 draws closer, the Working Group on Sterling Risk-Free Reference Rates (the Working Group) published a Q&A that aims to address the end-Q1 milestone for no new GBP LIBOR lending and a best practice guide for GBP referencing loans (the Best Practice Guide) on February 26, 2021.

As discussed in our previous blog post (which can be found here), the Working Group recommended that market participants should not initiate new GBP LIBOR referencing loan products expiring post 2021, after the end of Q1 2021. The Q&A has been prepared to highlight considerations that market participants should take into account and addresses important questions in relation to the end-Q1 milestone.Continue Reading GBP Working Group publishes Q&A and Best Practice Guide

On January 28, 2021, the UK Loan Market Association (LMA) published exposure drafts of two multicurrency term and revolving facilities agreements which incorporate, among others, backward-looking compounded risk-free rates (the Exposure Drafts). In addition, the LMA published commentary on the Exposure Drafts, which aims to assist market participants in understanding the terms thereof. The Exposure Drafts are based on the LMA’s exposure draft switch rate agreements discussed in our earlier blog post. The LMA hopes that their publication will facilitate awareness of the issues involved in structuring multicurrency syndicated loans which use backward-looking compounded risk-free rates (RFRs).
Continue Reading LMA Publishes RFR Facility Documentation

With the end of LIBOR drawing closer, the FCA, Bank of England and the Working Group on Sterling Risk-Free Reference Rates (the Working Group) are encouraging market participants to actively transition from referencing LIBOR rates in their loan agreements to risk-free rates (such as SONIA). In this respect, one important aspect that market participants need to consider is the credit spread adjustment (CAS) that will be required. Market participants use a CAS to mitigate the risk of value transfer when transitioning to risk-free rates due to the difference between LIBOR rates and the risk-free rates, caused by the lack of a credit risk premium in risk-free rates.
Continue Reading UK Working Group Publishes Paper on Credit Adjustment Spread Methodologies

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.
Continue Reading FCA, Bank of England Urge Shift in Swaps Quoting Conventions to Assist in Transition From LIBOR

Update: The Bank of England has delayed the introduction of increased haircuts to apply to all LIBOR linked collateral. For more details, please refer to our July 28 post.

The FCA and the Bank of England (BoE) have encouraged market participants to switch from LIBOR to SONIA from March 2, 2020 in all new trades.  Some market participants have already started referencing RFRs.  For the year to date ending on March 6, 2020 the following notionals* (as published by ISDA) were traded.

RFR Traded Notional Trade Count
SOFR $222.9 billion 998
SONIA $7.1 trillion 6,304
€STR $0.9 billion 16
SARON $4.2 billion 9
TONAR $76.3 billion 178

Continue Reading Recent Commentary from the UK Financial Conduct Authority (FCA) and Bank of England