On July 17, 2018, the BoE's Working Group on Risk-Free Reference Rates launched a consultation on term reference rates for the Sterling Overnight Index Average.
The Working Group is tasked with facilitating the transition across sterling bond, loan and derivatives markets from the use of sterling LIBOR to the use of SONIA. The Working Group notes that SONIA is an overnight rate, while LIBOR is commonly referenced in longer tenors of three or six months. Some end-users in loan and debt capital markets have reported that term rates are essential for their business needs.
The consultation focuses on how a term SONIA reference rate (TSRR) can be constructed to facilitate sterling LIBOR transition in markets where term rates better suit users' needs. The Working Group seeks feedback on how the development of TSRRs could be catalyzed. The Working Group notes that the International Swaps and Derivatives Association is simultaneously consulting on preventing derivatives market disruption in the event a key IBOR is discontinued and that the FSB has also recently stressed the importance to financial stability of transitioning most derivatives to robust overnight risk-free rates.
Comments on the consultation are invited by September 30, 2018. The Working Group anticipates that a number steps would be required to produce robust and reliable TSRRs by the second half of 2019.
The consultation paper is available at: https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/consultation-on-term-sonia-reference-rates.pdf, details of the ISDA consultation on IBOR fallbacks for OTC derivatives contracts are available at: https://finreg.shearman.com/international-swaps-and-derivatives-association-c and details of the Financial Stability Board's position paper is available at: https://finreg.shearman.com/financial-stability-board-welcomes-isda-consultat.
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