LIBOR transition in the derivatives market

The FCA has worked alongside other regulators, trade associations and market participants to enable liquid markets in SONIA derivatives to help the transition from LIBOR.

Building derivative market liquidity in alternative rates  

Alongside the Bank of England, we have undertaken several initiatives to build liquidity in SONIA derivative markets. The FCA and Bank of England have worked with market participants to encourage use of SONIA rather than LIBOR from a series of dates in specific products to develop the SONIA ecosystem and reduce the risk of cliff-edges on regulatory milestones.  

From 27 October 2020 participants in the sterling interdealer interest rate swaps market were encouraged to change the quoting convention from GBP LIBOR to SONIA. 

From 11 May 2021 participants in the sterling interdealer non-linear derivatives were encouraged to change the quoting convention from GBP LIBOR to SONIA.  

From 17 June 2021 market participants were encouraged to switch the default trading instrument in sterling exchange traded derivatives to SONIA instead of LIBOR.  

A similar initiative has been recommended by the CFTC’s Market Risk Advisory Committee’s Interest Rate Benchmark Committee to shift liquidity from USD LIBOR to SOFR in interdealer interest rate swap markets. This has been modelled on the SONIA initiatives. The FCA and the Bank of England have encouraged all participants in the interdealer US dollar interest rate swaps market to take the steps necessary to prepare for and implement these changes to market conventions on 26 July and shift liquidity away from USD LIBOR to SOFR.

Enhancing contractual robustness in the derivatives market  

On 23 October 2020, the International Swaps and Derivatives Association (ISDA) launched its IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol. The FSB’s OSSG had asked ISDA to lead the work on derivatives robustness and ISDA consulted on how best to calculate fair replacement rates for LIBOR. Through the FSB, authorities globally have strongly encouraged adherence to the Protocol, which came into effect on 25 January 2021 for all adhering parties.

The Protocol is an important tool in facilitating transition to alternative rates for legacy LIBOR derivative contracts, with almost 14,000 firms now signed up to the Protocol. The Protocol remains open for adherence. See the ISDA's information on how to do this.

LIBOR transition and firms’ obligations under UK EMIR  

The transition away from LIBOR in the derivatives market interacts with certain obligations under the UK European Market Infrastructure Regulation on Derivatives (UK EMIR). We have taken steps to clarify our expectations.

The FCA’s view is that amending a reference rate or adding a fallback would not trigger the application of margin or clearing requirements under UK EMIR, where this amendment relates to the treatment of legacy LIBOR trades (as set out previously in the minutes of the Working Group on Sterling Risk-Free Reference Rates meeting of 7 November 2019, paragraph 23).

We have also clarified our expectations regarding reporting requirements under UK EMIR in the context of LIBOR transition and the operation of contractual fallbacks: March 2021 news statement.

Derivatives Clearing and Trading Obligation

The Bank of England is consulting on their proposal to modify the scope of contracts which are subject to derivatives clearing obligation to reflect the ongoing reforms to interest rate benchmarks. This consultation is open until 14 July.

The FCA will be consulting on the consequences of LIBOR transition for the derivatives trading obligation.