Minutes of the Working Group on Sterling Risk-Free Reference Rates - November 2021

Agenda

1. Standing Items
   a. Welcome
   b. Competition law reminder
2. Official Sector Updates
   a. Bank of England
   b. Financial Conduct Authority
3. Progress Update from the Alternative Reference Rate Committee Chair on US dollar Transition
4. CCP updates from ICE and LCH
5. Planned RFRWG communications for year end and Q1 2022
6. Update from Sub-Groups and Task Forces
   a. Loan Enablers Task Force
   b. Non-linear Derivative Task Force
   c. Bond Market Sub-Group
   d. Infrastructure Sub-Group
7. Future plans for the RFRWG
8. AOB

Minutes

Item 1 - Standing items

The Chair welcomed attendees to the final Working Group meeting ahead of the changes to LIBOR at the end of the year, including cessation of GBP panel bank LIBOR.

The Working Group's Competition Law Counsel reminded members of their responsibilities under competition law.

Item 2 - Official Sector Updates

2a. Bank of England

The Bank of England noted positive volumes in new SONIA linked business, including in products where transition had previously seen slower momentum such as exchange-traded futures and options.

Active conversion away from legacy LIBOR linked contracts had been supported by increased liquidity of, and familiarity with, the SONIA-linked product set, and there had been notable momentum to convert outstanding contracts as year-end approached. More complicated areas to transition such as syndicated lending had however, been experiencing slower transition and more needed to be done to ensure all parties worked together to transition away from LIBOR linked contracts.

The Government's Infrastructure and Projects Authority (IPA) that works with the Cabinet Office and HM Treasury had provided updated guidance in October to aid active transition of infrastructure linked finance products used within the Private Finance Initiative sector (e.g. loans and/or swaps).

There was increasing focus on the key large scale conversion events i.e. upcoming CCP conversion weekends through December and the application of the ISDA IBOR Fallbacks in the New Year. The Bank re-iterated that all firms should make sure they are prepared for these events.

2b. Financial Conduct Authority

On 16 November, the FCA released publications confirming the rules for legacy use of synthetic LIBOR rates by all contracts except cleared derivatives and no new use of US dollar LIBOR from end-2021 except for limited exceptions. The FCA emphasised that synthetic LIBOR provides only a temporary bridge, and synthetic sterling rates are not guaranteed beyond end-2022. Continued active transition was essential.

The FCA noted that, although the case for publishing synthetic LIBOR was strong, the scale of outstanding contracts varied across settings and tenors. The FCA will consider whether certain synthetic settings could be retired more rapidly than others.

The Critical Benchmarks Bill had completed its passage through the House of Commons and was expected to receive royal assent shortly. As such, the provisions were likely to come into force by the end of this year.

The FCA highlighted that they had received queries regarding some contracts which rely, upon cessation of the relevant LIBOR setting, on fallbacks involving "dealer polls". The FCA did not think it would be appropriate or reasonable for it to put regulatory pressure on firms to respond to such polls. The FCA asked for firms to inform it bilaterally if they will be prepared to provide such quotes. The FCA noted it is helpful if market participants are able to assess and conclude at appropriate speed whether such dealer polls will work, and thus whether they must proceed to the next step in the waterfall, or contact the counterparty to agree alternative arrangements. Banks that might receive such requests may wish to consider setting up a centralised point to receive and make clear if any response will be provided to such requests. They may wish to consider being clear in their client or other communications where they have policies to decline to respond

Item 3 - Progress Update from the Alternative Reference Rate Committee ("ARRC") Chair on US Dollar Transition

The ARRC Chair joined the meeting to provide an update on the progress of the adoption of the Secured Overnight Finance Rate (SOFR) in USD markets. This included the SOFR First milestones to date, with SOFR First for linear swaps, RFR First for cross-currency swaps and SOFR First for non-linear derivatives all launching smoothly. The ARRC Chair highlighted market participants' feedback that they found SOFR swaps simple to transact and liquidity comparable to LIBOR swaps.

The ARRC had formally recommended CME Group's forward-looking SOFR term rates on 29 July 2021. These provided a significant boost in the transition away from lending linked to USD LIBOR. Whilst derivative markets should continue to be based on compounded SOFR where possible, term-SOFR had been welcomed by many borrowers.

The ARRC Chair noted the value of international coordination in both the public and private sectors. Recent announcements such as the FSB statement had been helpful in highlighting the need for global efforts to continue, including on the co-ordination on no new use of USD LIBOR from the end of 2021.

A question was raised regarding whether the ARRC or the official sector in the US had any plans to further improve awareness of the transition from USD LIBOR given some market participants still had queries on what constitutes new use of USD LIBOR post year-end. The ARRC Chair recommended any firms that had queries should feel confident approaching their relevant US supervisor(s) who would be able to provide guidance on what actions were appropriate under the most recent regulations and announcements.

Item 4 - CCP updates from ICE and LCH

The FCA thanked market participants for proactively transitioning ahead of the CCP conversions. The stock of outstanding SONIA swaps now exceed LIBOR swaps by 40%.

ICE outlined its sterling conversion plans, and noted that its plans for Swiss franc conversion were identical. It was indicated that over the ICE conversion weekend (17-19 December), firms should not see any changes to clearing access, with the exchange closing at normal hours on Friday and opening as usual on Monday. ICE had asked any firms who had not yet done so to read through the resources and documents available on its website. For firms providing trading access to clients, it was important to set pre-trade risk limits for SONIA and SARON, and to ensure these limits were correct.

Ahead of the transition weekend, ICE had continued to see firms converting their Libor exposure to SONIA in the market, with 52% of sterling futures trading on SONIA. 57% of options open interest was now in SONIA, a number which went to 93% if one removed the December open interest which will expire ahead of the transition weekend. ICE had seen an increasing shift in firms automatically pricing in SONIA.

LCH provided an update on its planned conversion over the weekend of 17 to 19 December. It was looking to convert approximately 203,000 trades (£13.2tn nominal), comprised of LIBOR-linked contracts that did not expire before end-2021.

Over the conversion weekend, LCH was going to have continuous customer support on hand and clients were invited to reach out if they had any questions. LCH was going to be communicating to customers every 3 hours over the planned conversion dates to provide updates on how the conversion was progressing and to alert customers of any delays. Item 7 - Principles of Human-Centric Design

Item 5 - Planned Working Group communications for year end and Q1 2022

The Communications Subgroup provided an update on its planned December and early 2022 communications. A draft of the proposed December statement had been shared with the Working Group.

Item 6 - Update from Sub-Groups and Task Forces

6a. Loan Enablers Task Force

The Loan Enablers Task Force noted new RFR Exposure Drafts of the secondary debt trading documents had been published by the Loan Market Association.The task force noted good momentum around active transition during Q3. This had slowed going into Q4 but was expected to pick up towards year-end. It was further highlighted that the FCA's clarity on permitted use of synthetic LIBOR had been welcomed by market participants.

6b. Non-Linear Derivatives Task Force

The Non-Linear Derivatives Task Force noted that in non-linear derivatives markets new trades were now almost exclusively in SONIA, and LIBOR quotes were rarely available. The Non-Linear Derivatives Task Force did not anticipate the need for any further action ahead of year-end especially now that the ISDA fallbacks to the GBP LIBOR ICE Swap Rate had been published.

The Non-Linear Derivatives Task Force highlighted the success of SOFR First for non-linear derivatives in USD markets which had seen the share of SOFR in interdealer trading rise to around 90%.

6c. Bond Market Sub-Group

The Bond Market Subgroup welcomed the FCA's clarification on the availability of synthetic LIBOR for legacy contracts. The continued progress of the Critical Benchmarks Bill was also welcomed.

Sterling bond markets were making good progress on active transition. Consent solicitations to transition legacy sterling LIBOR bonds had successfully converted c.£66bn, which represented roughly 2/3 by value and 1/5 by number of bonds. However, the Bond Market Subgroup noted that active transition alone was unlikely to be sufficient for complete transition of all outstanding sterling bonds.

6d. Infrastructure Sub-Group

The Infrastructure Subgroup had not identified any further work it felt was required ahead of year-end.

Item 7 - Future plans for the Working Group

The Working Group Chair proposed to use the January meeting to review the progress of the Working Group and its task forces/subgroups against their respective terms of reference. Some assessment metrics would be shared ahead of that meeting. Any Working Group members who had particular views on success metrics were encouraged to reach out to the Secretariat in writing.

Absent new issues emerging over year-end, 26 January 2022 could potentially be the final meeting of the Working Group in its present format. The Working Group would need to consider what, if any, further work there was for it to do once the broad-based transition to SONIA had been completed, and whether that work would be better carried out through a reformulated group.

Attendees

Private sector attendees

Tushar Morzaria, Barclays (Chair)
Andreas Giannopoulos, Barclays (Chair's Office)
Joseph McQuade, Barclays (Chair's Office)
Helen Robinson, Barclays (Chair's Office)
Paul Mansour, Barclays (Chair's Office)
Shaun Kennedy, Associated British Ports
Sarah Boyce, Association of Corporate Treasures
Alexandre Papadacci, Axa
Doug Laurie, Barclays
Katherine Ashdown, Bank of America
Snigdha Singh, Bank of America
Greg Olsen, Clifford Chance (Competition Law Counsel)
Zsolt Szollosi, Credit Suisse
Michael Barron, Deutsche Bank
Simon Goodwin, Deutsche Bank
Axel van Nederveen, EBRD
Alan Farrell, Goldman Sachs
John O'Sullivan, HSBC
Matthew Horton, ICE Futures Europe
Stuart Williams, ICE Futures Europe (Item 4 only)
Paul Richards, ICMA
David Jamieson, Insight Investment
Rick Sandilands, ISDA
Kari Hallgrimsson, JP Morgan
Guy Whitby-Smith, Legal & General Investment Management
Catherine Boobier, Lloyds Banking Group
Clare Dawson, Loan Market Association
Susi de Verdelon, LCH (Item 4 only)
Philip Whitehurst, LCH
Kasia Abendan, M&G
Tom Wipf, Morgan Stanley (ARRC Chair)
Tom Dyson, Nationwide
Jamieson Thrower, NatWest Markets
Bob Goodfellow, NatWest Markets
Phil Lloyd, NatWest Markets
Rachael Macpherson, Shell
Daniel Cichocki, UK Finance
Stephen Pegge, UK Finance
Douglas MacIntosh, UBS

Official sector attendees

Alastair Hughes, Bank of England
Arif Merali, Bank of England
Nicole Stirk, Bank of England
Leman Menguturk, Bank of England
Raza Rehman, Bank of England
Charlotte Buckingham, Bank of England
Edwin Schooling-Latter, FCA
Helen Boyd, FCA
Anne-Laure Condat, FCA
Toby Williams, FCA