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Articles Fixed Income Archive Regulation

New Sterling FRNs Transition From Libor

New public issues of floating rate note notes mature beyond 2021 nearly all stopped referencing sterling Libor as regulators want markets to move to new risk-free reference rates.

The International Capital Market Association (ICMA), a trade body, said in its third quarter report that considerable progress has already been made with adoption of Sonia in new public issues of floating rate notes over the past year.

The UK has adopted the Sterling Overnight Index Average (Sonia) as its new risk-free reference rate to replace sterling Libor. After the financial crisis there were a series of scandals regarding banks manipulating their submissions for setting benchmarks across asset classes, which led to a lack of confidence and threatened participation in the related markets. As a result, regulators have increased their supervision of benchmarks and want to move to risk-free reference rates which are based on transactions, so they are harder to manipulate and more representative of the market.

Paul Richards, head, market practice and regulatory policy at ICMA, said in the report: “The authorities have warned market firms that LIBOR may not continue beyond the end of 2021; that they need to prepare for the transition to risk-free rates; and that their preparations will be monitored by their supervisors.”

The report said  £20.5bn ($31bn) of Sonia floating rate notes were issued in in the first half of this year, compared with £6.9bn in the second half of last year. There were 35 new FRN transactions referencing Sonia in the first half of this year, up from 12 in the second half of 2018, an increasing amount of secondary market activity; and more than 180 investors.

Paul Richards, ICMA

“As a result, new public issues of FRNs referencing sterling LIBOR maturing beyond the end of 2021 have all but ceased,”added Richards.

In addition, securitisations referencing Sonia have also begin to take place with Nationwide, a UK financial institution, launching the first securitisation referencing Sonia distributed to investors in April this year.

ICMA said: “The adoption of Sonia in new bond issues, coupled with the use of more robust fallbacks in case there are any more new bond issues still referencing Libor with maturities beyond the end of 2021, both help to cap the scale of the legacy Libor bond problem. But they do not solve it.”

Although maturing bonds will reduce the scale of the problem over time, ICMA noted there is a significant volume of maturities beyond 2030, and some bonds are perpetual, with no maturity date.

Interest rate provisions in bond contracts through a process of consent solicitation and the first example occurred this year.  ABP replaced Libor with compounded Sonia plus a fixed spread was launched in relation to £65m FRNs due in 2022. A meeting of the noteholders on 11 June 2019 passed the extraordinary resolution.

“Even so, the use of consent solicitations to transition the whole of the legacy bond market – involving vanilla FRNs, covered bonds, capital securities and securitisations – would be a long, complex and expensive process and would not necessarily be successful,” added ICMA. “This is because individual bonds – which are freely transferable – are often held by many (eg several thousand) investors, and consent thresholds are generally high.”


The eurozone is transitioning from Eonia, the euro overnight index average to €STR, the new euro short-term rate. Last week the European Central Bank sent a letter to chief executives of significant financial institutions regarding their preparation related to interest rate benchmark reforms and the use of risk-free rates

The letter said: “The purpose of this letter is to seek assurance that institutions’ senior managers and boards understand the risks associated with these global benchmark reforms and are taking appropriate action now to ensure a smooth transition to alternative or reformed benchmark rates ahead of the deadline of the end of 20211 specified in the revised EU Benchmarks Regulation (BMR), taking into account that certain changes in the methodology for relevant benchmark rates as outlined below will be introduced as soon as October 2019.”

The ECB is committed to launching the €STR on 2 October this year and Eonia will be discontinued at the very beginning of 2022. The central bank has asked firms to provide a board-approved summary of the institution’s assessment of key risks relating to the benchmark reform and a detailed action plan to mitigate these risks by 31 July.


The USA is transitioning to SOFR, the secured overnight financing rate. Chris Barnes  at derivatives analytics provider Clarus Financial said in a blog that SOFR traded notional for interest rate swaps hit $50bn in monthly notional for the first time in June.

“All measures point towards increased activity and a more healthy market than when we first started writing about these trades all the way back in July 2018,” Barnes added. “May and June 2019 activity in SOFR was comfortably higher than previous months.”

There is now typically at least one SOFR interest rate swap trade per trading day.


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