Collateral referencing LIBOR
On 5 March 2021, the FCA confirmed that all LIBOR settings will either cease to be provided by any administrator or will no longer be representative:
- immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
- immediately after 30 June 2023, in the case of the remaining US dollar settings.
Update 19 May 2022
The Bank’s policy for collateral referencing overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings for use in the SMF is detailed in this Market Notice, published on 19 May 2022.
The policy objective is to encourage forward planning by both the Bank and SMF members to ensure that borrowing capacity is maintained and that public money is appropriately protected against the risks of a disorderly USD LIBOR transition.
The policy adopts a haircut glide path for collateral referencing the USD LIBOR settings noted above and maturing after mid-2023, that will be phased in from 1 October 2022 and result in haircuts being 100% by 30 June 2023, at which point all USD LIBOR linked collateral will cease to be eligible for use in the SMF (with the exception of collateral that has been provided to the Bank prior to 30 June 2023 and meets the conditions specified in the Market Notice published on 19 May 2022).
As outlined below, if certain conditions are satisfied, collateral referencing the USD LIBOR settings noted above which benefits from a robust fallback or future rate switch mechanism may not be subject to the haircut glide path.
On 30 November 2020, the US agencies issued a statement to encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by 31 December 2021. On 16 November 2021, the Financial Conduct Authority announced that from 1 January 2022, it would prohibit new use of USD LIBOR by supervised entities, with limited exceptions. In line with these statements, the Bank will not accept any collateral referencing USD LIBOR settings that is issued on or after 1 January 2022 (regardless of whether it contains a robust fallback or future rate switch mechanism).
The Bank’s policy for collateral referencing all other LIBOR rates for use in the SMF is detailed in this Market Notice, published on 24 March 2021.
These Market Notices update the Bank’s previous Market Notices dated 07 May 2020 and 26 February 2020.
Fallbacks and future rate switch mechanisms
Subject to conducting further due diligence, the Bank will consider waiving the application of scheduled LIBOR linked haircut add-ons to LIBOR linked collateral where it is satisfied (in its sole discretion) that such collateral benefits from a robust fallback or a future rate switch mechanism that meets either or, where relevant, both of the conditions set out in the Market Notice published on 19 May 2022 for overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings, or the conditions set out in the Market Notice published on 24 March 2021 for all other LIBOR rates.
Furthermore, collateral referencing the USD LIBOR settings noted above that is issued on or after 1 April 2021 and before 1 January 2022 will not be eligible unless the Bank is satisfied (in its sole discretion) that such collateral benefits from a robust fallback or a future rate switch mechanism that meets either or, where relevant, both of the conditions set out in the Market Notice published on 19 May 2022.
If SMF participants consider that their LIBOR linked collateral benefits from a robust fallback or future rate switch mechanism and therefore want the Bank to consider waiving the application of scheduled LIBOR linked haircut add-ons to their LIBOR linked collateral, they will be required to complete additional due diligence on the fallback or future rate switch mechanism. Participants should refer to the Q&A documents below (see in ‘Legal documentation’ section below) for details of the required due diligence process. In line with the SMF’s general terms and conditions, any costs, including legal costs, incurred by the Bank in relation to such due diligence process will be charged back to the SMF participant.
Upfront replacement of LIBOR with an alternative rate
A more direct way to transition collateral away from LIBOR is to make contractual amendments that have the effect of immediately replacing LIBOR with an alternative rate (rather than at some point in the future). For LIBOR linked loan portfolios and collateral securities backed by loans where one or more loans in the portfolio was a LIBOR linked loan before the contractual amendments came in to effect, the Bank will require participants to complete a similar due diligence process to that mentioned above in relation to fallbacks and future rate switch mechanisms, if they would like these to be considered for a waiver. This is in order for the Bank to satisfy itself (in its sole discretion) that those contractual amendments are legally binding, enforceable and irrevocable and will ensure that LIBOR has been replaced with an alternative rate.
Communication by SMF participants of their transition plans for LIBOR linked collateral
Participants are encouraged to communicate and engage proactively with the Bank on their plans for managing any LIBOR linked collateral. This also includes where participants plan to simply withdraw any LIBOR linked collateral.