It said although “important milestones” were met in 2019, “greater momentum” was needed this year, which the letter described as a “key year for transition”.
The regulators said it required firms to carry out a set of targets listed by the Working Group on Sterling Risk Free Reference Rates (RFRWG) to ensure “orderly and timely” progress.
These included enabling a further shift of volumes from London Interbank Offer Rate (LIBOR) to Sterling Overnight Index Average (SONIA) in derivative markets. This is supported by a statement from the Bank and the FCA encouraging a switch in the benchmark for sterling interest rate swaps from 2 March 2020; ceasing the issuance of cash products linked to sterling LIBOR by end-Q3 2020; and the significant reduction of the stock of LIBOR-linked contracts by Q1 2021.
The regulators also suggested that to support the targets, product development, the updating of loan system capabilities, client communications and the updating of documents should all feature in firms’ planning from Q1.
Last year, the Bank of England urged lenders to speed up the LIBOR transition and threatened to take action if it felt progress wasn’t being made.
LIBOR is based on the average at which large global banks lend funds to each other and is commonly calculated in seven maturities across five currencies, Alex Maddox, capital markets director of Kensington Mortgages explained.
Conversely, SONIA is based on actual transactions and is not set on different maturities. It reflects the actual average interest rates that banks pay to borrow sterling overnight from other institutions.
SONIA has been put forward by regulators as the preferred replacement, but risk-free alternatives can include the Bank Base Rate, Standard Variable Rate as suggested by The Mortgage Lender’s deputy CEO Peter Beaumont.