|
Strategy & Sales |
|
Market Structure / Regulation,
Global
06 June 2019 08:39
Authors
Phil Lloyd
Head of Market Structure & Regulatory Customer Engagement
London
+44 20 7085 1271
Contributors
{{contributor-span-repeater}}
|
On 5th June the Bank of England hosted Last Orders: Calling time on LIBOR.
Though there were no ground-breaking new announcements, both Dave Ramsden of BoE and Andrew Bailey of FCA reaffirmed their commitment to a future without LIBOR after 2021. This echoes Megan Butler's speech in February.
The message was clear, time is being called on LIBOR.
Key takeaways from the conference:
For more information see the Bank of England website and our summaries below:
See also our recent roundup of other LIBOR news in May, including a link to our SONIA Realised Rate Calculator.
Last Orders: Calling Time on LIBOR (Dave Ramsden)
In his speech Ramsden recognises that some good change has happened but is very clear that there is more to be done, and quickly – "the pace of progress needs to accelerate".
The way banks fund themselves has changed - "in the first quarter of this year there were on average only 9 deposits a day underpinning 6 month sterling Libor, with a total daily value of £81 million. This lack of transactions means that panel banks have to use their expert judgement to make their submissions…this means they have become increasingly uncomfortable doing so…if those panel banks stop submitting, there is no Libor benchmark."
He acknowledges that transitioning is happening and there has been real progress – "the first 5 months of 2019 have seen 21 different banks, sovereigns, and supranationals issue FRNs referencing compounded SONIA, with a total value of about £19bn. However, we are yet to see a Sonia based loan and there needs to be more done on building the required infrastructure to accommodate a SONIA linked world....there is much more to be done".
Ramsden suggested that they are going to start intensifying the level of supervision on this now to ensure that firms are ready for the end 2021, and they will be reaching out to every firm individually as a follow on from the ‘Dear CEO’ letter. They emphasise that this is a matter that the most senior members at firms should be involved in.
Ramsden noted that the BOE is continuing to work alongside the FSB, considering this a "global issue".
Working Group on Sterling Risk-Free Reference Rates (Tushar Morzaria)
Transitioning to SONIA in the sterling derivatives and cash markets – immediate priorities:
Term Rate
Liquidity in SONIA referencing is increasing but not uniformly across products. Need for a SONIA based term rate to enable move away from LIBOR but the challenge is how to replace a 3 month LIBOR rate with overnight SONIA. The Working Group has conducted extensive analysis to date (Term SONIA Reference Rate Consultation (TSSR) available on the Bank’s website) which concluded that a TSSR would help facilitate transition for cash market users, i.e. loan markets where usage of forward-looking rates is common but corporate borrowers are likely to prefer reference compounded SONIA. Users of both cash and derivatives products encouraged to press ahead on that basis.
SONIA adoption advanced quickly over the last year, not only in derivatives, but also in FRNs and securitisations. "The Working Group does expect the future use of any forward-looking risk-free term rate in cash markets to be more limited than the current use of LIBOR." However, "the Working Group concluded a term rate could help to reduce the reliance on LIBOR".
Potential Administrators of a SONIA-based term rate are:
• ICE Benchmark
More news on this expected later in the year.
Market participants are concerned about effects on hedge accounting. In particular, "questions have been raised with regards to how the transition will affect these beneficial relationships; does the cessation of LIBOR mean some hedge accounting treatment may no longer be permitted?"
The International Accounting Standards Board (IASB) has been looking closely as such reporting matters and published a consultation paper last month. "The Bank’s expectation is that the IASB will implement welcomed relief from next January."
The key point here is to try to identify some of "laws and regulations that exist which perhaps did not contemplate the transition from LIBOR." Some of these laws may inadvertently hinder the general adoption of risk free rates. A task force has been set up by the Working Group, chaired by the FCA, that will consider these implications. "Some of the issues identified so far are as diverse as EU mandated discount curves, domestic capital model approvals and grandfathering of legacy swaps under global margin rules." There will clearly be implications outside of the UK.
"To ensure visibility and support for the transition across senior peers in the UK", the Working Group has reached out to senior leaders to form an advisory group. The aim of this group is to support the Working Group, to help add momentum to drive the transition effort in order to be ready for the end of 2021. This wider group met for the first time this morning and are committed to a common purpose.
The FCA and PRA wrote to CEOs of major banks and insurers in September 2018 asking for details on work to transition away from Libor.
Clear message that the regulator wants all firms to complete a comprehensive assessment of how LIBOR interacts with the firm’s business.
Observations made across 8 key areas, highlights include:
Roadmap published by the working group
Reiteration of the message that "the FCA has said it does not intend to use its powers to maintain LIBOR beyond end-2021".
Targets in the roadmap
This is Non-Independent Research, as defined by the Financial Conduct Authority.This material should be regarded as a marketing communication and may have been produced in conjunction with the NatWest Markets Plc trading desks that trade as principal in the instruments mentioned herein. All data is accurate as of the report date, unless otherwise specified.
This communication has been prepared by NatWest Markets Plc, and should be regarded as a Marketing Communication, for which the relevant competent authority is the UK Financial Conduct Authority. Please follow the link for the following information https://www.natwestmarkets.com/natwest-markets/regulation/mar-disclosures.html
Where communicated in Singapore, this communication may be deemed an advertisement. This advertisement has not been reviewed by the Monetary Authority of Singapore.
Phil Lloyd, NWM Sales |
This material is intended for your sole use and is provided to you on the understanding that, before entering into any transaction referred to in this material, and/or any related transaction (together, the “Transaction”), you will ensure that you fully understand the potential risks and return of the Transaction and determine whether the Transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. Nothing in this material constitutes an offer or invitation to enter into any engagement or transaction or an offer or invitation for the sale, purchase, exchange or transfer of any securities or a recommendation to enter into any transaction, nor is it intended to form the basis of any investment decision. None of NatWest Markets Plc, NatWest Markets N.V. (and/or any branches), NatWest Markets Securities Inc. and/or their affiliates (“NatWest Markets”) is soliciting any specific action based on this material. The material does not take into account the particular investment objectives, financial conditions, or needs of individual clients or whether any transaction is suitable for any particular investor. The remuneration of the author(s) is not directly tied to any transactions performed, or trading fees received, by any entity of the NatWest Group, for example, through the use of commission-based remuneration arrangements.
This material has been prepared by NatWest Markets and has not been prepared in accordance with the legal and regulatory requirements designed to promote the independence of investment research, and is not subject to any prohibition on dealing ahead of its dissemination. Any views expressed may differ from those of other business units of NatWest Markets. The opinions, commentaries, forecasts, assumptions, estimates, derived valuations and target price(s) or other statements contained in this communication (the “Views”) are valid as at the date and/or time indicated and are subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. Views expressed herein are not intended to be, and should not be viewed as advice or as a personal recommendation. The Views may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this material. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with the Transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this document and make such other investigations as you deem necessary including obtaining independent financial advice, before participating in any transaction in relation to the securities referred to in this document. This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The information contained herein is confidential and may not be given (in whole or part) or otherwise distributed to any other third party without the prior written consent of NatWest Markets.
NatWest Markets and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this material and/or in related financial instruments giving rise to potential conflicts of interest which may impact the performance of such financial instruments. Such interests may include, but are not limited to, (a) dealing in, trading, holding or acting as market-maker or liquidity provider in such financial instruments and any reference obligations; (b) entering into hedging strategies on behalf of issuer clients and their affiliates, investor clients or for itself or its affiliates and connected companies; and (c) providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein. NatWest Markets and its affiliates, connected companies, employees or clients may at any time acquire, hold or dispose of long or short positions (including hedging and trading positions) which may impact the performance of a financial instrument.
This material may relate to over-the-counter derivatives (“OTC Derivatives”) in which case you should be aware that OTC Derivatives can provide benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (among other things) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place. Therefore you should also determine whether OTC Derivatives are appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.
If you enter into an OTC Derivative transaction and decide to close out the transaction, or the transaction otherwise terminates before its scheduled termination date, you may have to pay break costs. These will be calculated by reference to prevailing market conditions and include any costs incurred by NatWest Markets in terminating any related financial instrument or trading position. Please note that such break costs can be substantial. If you enter into an OTC Derivative transaction for the purposes of hedging a loan or other debt and you subsequently wish to repay the debt (whether through refinancing or otherwise), you should be aware that it may be necessary for NatWest Markets to terminate the hedging transaction before its scheduled termination date and satisfy any liabilities that you may have to it with respect to such transaction (including break costs) before NatWest Markets will release any related security that you have provided to it.
This material has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this document has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of this material, nor does NatWest Markets accept any obligation to any recipient to update, correct or determine the reasonableness of such information or assumptions contained herein. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.
In the U.S., this material, to the extent it relates to securities, is intended for distribution only to major institutional investors as defined in Rule 15a-6 of the U.S. Securities Exchange Act of 1934 as amended (excluding documents produced by our affiliates within the U.S. which are subject to the following disclaimer https://www.agilemarkets.com/api/ds/v1/d isclaimer/publication/2756). This material is not intended as an offer or the solicitation of an offer to buy or sell securities as defined under U.S. securities laws.
Notwithstanding the foregoing (but subject to any applicable federal or state securities laws), NatWest Markets and the recipient may disclose to any and all persons, without limitation, the tax treatment and tax structure of any transaction contemplated hereby and all materials (including opinions or other tax analyses) relating thereto. IRS Circular 230 Disclosure: NatWest Markets does not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with NatWest Markets of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
NatWest Markets Plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority and is provisionally registered as a swap dealer with the United States Commodity Futures Commission. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised by De Nederlandsche Bank and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. Agency agreements exist between different members of NatWest Group. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc. NatWest Markets Securities Inc. is authorised by NatWest Markets Plc to act as its agent for certain kinds of its activities.
Copyright © NatWest Markets Plc. All rights reserved.