BoE staggers Libor haircuts to mirror FCA delays

The Bank of England has altered its roadmap for phasing out the use of the Libor interest rate benchmark by UK banks to April next year, mirroring a delay announced by the Financial Conduct Authority last month.

In a market notice published on 7 May, the Bank of England (BoE) said it will gradually increase the haircut imposed on Libor-linked collateral used in its liquidity operations on 1 April 2021, six months after the original date of 1 October 2020.

The BoE currently makes an average reduction of 25% on the value of Libor-linked collateral – known as haircutting – when deciding how much to lend in an effort to phase in replacements for the benchmark.

Under the new adjustments, this reduction will rise to 35% in April 2021 and then to 75% the following September, before a final capping of 100% on 31 December 2021.  

The Financial Conduct Authority (FCA) announced the delays on 29 April, citing the impact of the coronavirus pandemic. “All new issuance of sterling Libor-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021,” it said in a statement.

Earlier FCA comments suggesting Libor transition would not be delayed was met with disquiet among practitioners, with some suggesting the planned schedule would leave banks vulnerable to a post-coronavirus market shock.

The BoE’s notice also included changes to the eligibility criteria of Libor-linked collateral connected to its own lending operations. Securities issued after 1 April and containing coupons or swap payments linked to the Libor benchmark will not be eligible to be put forth by banks looking to borrow from the BoE.

On 30 April, one day after the FCA announcement, the US Federal Reserve announced a backtrack to its plans for the benchmarking of its Main Street Lending programme. It said the programme will now be entirely underpinned by the Libor benchmark, switching from the secured overnight financing rate (Sofr) it had previously put forward.

The Fed initially intended to promote the new Sofr benchmark through the programme, but said it ultimately decided to revert back to Libor after feedback from participants.

The Alternative Reference Rates Committee, a group of private-market participants called upon by the Federal Reserve Board to facilitate the Libor transition, had endorsed Sofr as the preferred replacement rate in June 2017.

Meanwhile, efforts to uproot the Libor benchmark out of the Singaporean financial system are continuing. DBS Bank announced on 6 May it had placed a notes issuance using the Singapore overnight rate average (Sora) replacement benchmark, which is thought to be the financial industry’s first issuance to be priced using the new rate.

In Switzerland, UBS Group announced the launch of new floating-rate mortgage loans tied to the new Swiss average rate overnight (Saron) on 11 May, signalling the end of Libor-linked mortgage loans at the bank.

Saron is determined by live market prices on a Swiss stock exchange platform used by banks and insurers.

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