The Bank of England and Financial Conduct Authority (FCA) are set to move beyond large institutions to a wider scope of market participants with a request for detailed updates on preparedness in the transition away from the London Inter-bank Offered Rate (Libor), according to Rich Fox, head of markets policy at the FCA and member of the regulator’s risk-free rate working group.
On a panel at the International Swaps and Derivatives Association (Isda)’s annual Europe conference in London, Fox cautioned that the regulators would be following up with the market after it had received “patchy” responses of preparedness to a letter to the chief executive officers of several large institutions on September 19, 2018.
“I want to be very clear that we will be pushing on that, the Bank of England pushing, you will be hearing from us,” said Fox. “And reaching out beyond the largest institutions a much more detailed data request is going to go out to a much wider range of market participants looking for data on exposures, qualitative detail on plans. Expect to hear from your supervisors.”
Readiness in the loan market is becoming a priority according to Fox, with the Sterling risk-free reference rates committee hoping that market lending will transition to the Sterling Overnight Index Average (Sonia) by the third quarter of 2020. But he warned that although debate will continue regarding tough legacy contracts such as old floating rate notes, regulators don’t have a hidden solution to the problem.
“Andrew Bailey wanted us to have an open debate about what we do with [tough legacy contracts]. And I must admit that debate is quite sobering. So, the RFR working group is going to be doing some work to define this a bit more clearly,” said Fox. “We’ve been doing the work, my colleagues are focused on this, the options are all quite bad.
“I want to stress that we are looking at this and we want to have a debate with the industry about what to do with these really difficult contracts, but we do not have an easy fix just sitting in the cupboard that we are waiting to unveil.”
But banks are struggling to use consistent language around the implementation of time lags in new contracts referencing Sonia, according to Shaun Kennedy, group treasurer at the Associated British Ports.
“Not all of our banks are quite ready to handle [the transition],” he said. “We’ve not really found consistency across language and particularly around lags. So, having the lags in the documents are really important for us but even in the swaps to reflect what we think we are going to be doing in bonds and loans. So, we’ve ended up with four or five different ways of saying the same thing.
“I think a real push to get consistency and language across all markets, to get some new markets off the ground is going to be really important for us and really important for corporates.”
In response to Kennedy's comments, Rick Sandilands, senior counsel, Europe at Isda said the organisation was working on standardised language, but is currently at draft stage.