Sarah Boyce, ACT’s Associate Director, Policy & Technical, who sensitively and adeptly chaired the “Benchmark reform” session dealt with the ‘Elephant in the Room’ immediately: the thought/hope that LIBOR could continue in some form, by saying that “Lets be clear, there is no possibility that LIBOR will continue.” She referred to BofE’s Andrew Bailey’s speech on 27 July 2017, about how panel banks will sustain LIBOR until end-2021 to enable transition, when he stressed, “Our intention is that, at the end of this period, it would no longer be necessary for the FCA to persuade, or compel, banks to submit to LIBOR.” Which means LIBOR benchmarks will be end from end 2021 for all currencies.
Around the world central banks, banks and corporates are developing an alternative RFR for each of the LIBOR currencies.
The Official Sector Steering Group (OSSG), convened by FSB, co-ordinates efforts of international authorities. There are working groups for each LIBOR currency:
Source & Copyright©2018 - Bank of England
Each will be different, e.g. the USD has to cover both consumer and as well as corporate funds which is much more complex than the GBP wich only covers corporate funds. So corporate treasury departments will have the problem of different RFR for each currency.
Developing alternative RFR in UK
Bank of England’s Sarah John, Head of Sterling Markets Division, presentation on Benchmark Reform - Transition to Risk-Free Rates (RFR) described the key challenges in strengthening LIBOR in UK:
- Lack of term deposit transactions
- Panel banks uncomfortable submitting based on judgement; risk they could withdraw
- Unplanned disappearance of LIBOR would lead to significant market disruption.
Sarah John explained that BofE has already reformed SONIA to make it more robust:
Source & Copyright©2018 - Bank fo England
Sarah John explored the issues in the transition from LIBOR to RFR:
- What’s the difference between LIBOR and RFR?
- Do interest rate benchmarks need a credit risk premium?
- Do interest rate benchmarks need a term premium and the ways to calculate term rates?
And then explained that the next steps in the UK’s transition to SONIA are:
- Working Group key milestones for 2018
- Term reference rate consultation – Q2
- Communicating best practice for referencing SONIA in contracts – for example, market conventions for how a backward looking rate can be used in cash markets.
- Corporate stakeholder forum to facilitate broader engagement with corporate community. First meeting organised for 22nd May.
Sarah John stressed that the BofE would really welcome help from corporates in this work. To get involved contact: RFR.firstname.lastname@example.org.
The panel - made up of Tom Gilliam FCT, Corporate Finance Director, GSK; Frances Hinden FCT, Vice President, Treasury Operations, Shell International; and Sarah John, Head of Sterling Markets Division, Bank of England - discussion covered many aspects of the what is involved in preparing for the new RFR, some key thoughts were:
- Need to work out what RFR means for all your contracts, e.g. swaps etc and whether this will require restructuring
- BofE will publish templates for loan contracts using the Risk-Free Rates
- Working parties are looking at how to construct forward looking rates
- Panellists were worried about eurozone as they are so far behind everyone else in their RFR development.
Finally, the panel were asked what they would recommend that corporate treasurers keep in mind as they prepare for the new RFR and the transition? Advice included:
- First recognise that it is going to happen; second review all current contracts; and third see what can be done in the contracts that you are about to enter which should include what will happen when LIBOR is replaced. Have these conversations with everyone involved in the contracts
- There is so much to do that you need to start working on the changes now, even though not all issues have been decided, e.g. hedge accounting, fall back, etc.
- Documentation has not been decided yet, need to wait for further details that will be published soon
- Try and think about how would use an RFR overnight rate and what would that entail in your corporate treasury
- Think about how you could get involved.
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