Press release: ACT welcomes corporate representation on interest rate benchmark working group

The ACT welcomes the appointment of Frances Hinden FCT (Vice President Treasury Operations, Shell International Ltd) as co-vice chair of the Working Group on Sterling Risk-Free Reference Rates. The Working Group, initiated by the Bank of England, has a new and broader mandate to facilitate a transition to the proposed Sterling Risk-Free benchmark, SONIA, across the sterling bond, loan and derivative markets. This follows on from the announcement in July 2017 by Andrew Bailey (Chief Executive Officer of the Financial Conduct Authority) that the FCA will no longer exercise its influence to facilitate the production of LIBOR after 2021.

The ACT also welcomes the announcement that a key priority for the Working Group is to consider the potential development of terms or tenors for SONIA. SONIA is an overnight reference rate and doesn’t currently have the set tenors, such as 3-month and 6-month rates, that LIBOR has. Corporates need a forward-looking rate with tenors in order to manage their liquidity and cashflow risk arising from interest payable on debt and derivative hedging instruments.

Caroline Stockmann, ACT Chief Executive said:
"Corporate representation at a senior level on the Working Group is a welcome move towards considering the development of a replacement interest rate benchmark that meets the needs of corporate users. Corporates need a stable and reliable benchmark not only for business and financial contracts, but also to forecast, manage and account for many business activities. Continuity of contracts that reference LIBOR is also fundamental for corporates.”




1. The relevance of LIBOR

LIBOR is the established reference rate used by companies in the majority of their short term and floating rate debt and interest rate hedging, and in commercial contracts of many kinds more widely.

  • There are legacy contracts for debt using LIBOR with maturities well into the future (the Wheatley Review found the longest at over 50 years)
  • There are other legacy contracts - particularly swaps hedging future movements in LIBOR rates that were done to hedge expected LIBOR-based debt, both for those swapping from floating to fixed and fixed to floating according to their own contingencies

2. The Sterling risk free reference rates working group

In the UK, the Financial Conduct Authority (FCA) is overseeing the reform of LIBOR (including sterling LIBOR) and the Bank of England is overseeing the development of sterling RFRs.

On 27 July Andrew Bailey announced that the FCA will no longer exercise its influence to facilitate the production of LIBOR after 2021. indicating that the survival of LIBOR post this period could not be guaranteed. A link to the speech is here.

Prior to this in May 2017 SONIA was chosen as the preferred risk-free interest rate benchmark for use in sterling derivatives and relevant financial contracts by the Working Group on Sterling Risk-Free Reference Rates. This is the same working group referred to in the press release above, however the former mandate of this group was narrower with a focus on derivatives as the group at that time comprised senior experts from major sterling swap dealers.

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