The Financial Conduct Authority (FCA) and the Bank of England (BoE) said they are planning to move the default interest-rate benchmark for the swap market from LIBOR or London Interbank Offered Rate to SONIA or Sterling Overnight Index Average by 27 October 2020.
29 September 2020 | AtoZ Markets – COVID-19 has changed the threat landscape for companies in the UK. Moreover, the Brexit transition period for the UK’s exit from the EU is coming at the end of December. The UK financial industry is coupling with challenges such as Brexit and COVID-19. FCA and BoE looking into the future of UK regulation and the customers.
New Quoting Conventions in Interest Rate Swap Markets
The FCA and BoE are urging liquidity providers in the Sterling swap market to adopt new quotes for inter-dealer trading based on SONIA rather than LIBOR by 27 October 2020. Both financial institutions want market participants to cease the initiation of new GBP LIBOR-linked linear, non-linear, and cross-currency derivatives that will mature after 2021 by end-Q1 2021. It is except for risk management of existing positions.
The FCA and BoE will take steps to promote & enable widespread use of SONIA compounded throughout 2020. “An FCA survey of liquidity providers identified strong support for a change in the interdealer quoting convention that would see SONIA rather than LIBOR become the default price,” the BoE said.
SONIA will replace LIBOR as the default benchmark for swap pricing of derivative products. UK regulators said LIBOR swaps will continue to be traded. But their pricing will be based on a conversion from SONIA’s swap prices.
The two financial institutions said that, it would benefit a wide range of end-users and other market participants towards moving out of LIBOR by further shifting market liquidity to SONIA swaps.
They further stated that “where new LIBOR transactions enter into, market participants should be aware of the risks. They should take appropriate steps to establish that their clients are too.”
The FCA had previously planned the initiative in March 2020 to accelerate the planned change in quotes. But this did not happen because of the pandemic.
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