UK Encourages Cross Currency Swaps Shift to RFRs in September

UK regulator Financial Conduct Authority (FCA) and the Bank of England have issued a release “encouraging” liquidity providers in the Libor cross currency swaps market to adopt new quoting conventions based upon risk-free rates (RFRs).

From 21 September, 2021, the Bank and FCA say trading in the inter-bank market should be based upon RFRs to facilitate a further shift away from Libor. The shift is a key milestone in the drive to move all cross currency swaps with a sterling-linked leg to RFRs, other than for existing risk management.

On 13 July, the US CFTC’s Market Risk Advisory Committee (MRAC) formally recommended a series of ‘SOFR First’ initiatives in US dollar markets, beginning with interdealer swap markets on 26 July. The MRAC recommendation also includes a subsequent step to replace use of Libor with RFRs in cross-currency swaps, identifying a potential date of 21 September.

In order to support markets in building the necessary liquidity to meet these milestones, the FCA and the Bank of England have previously encouraged UK market participants to support the US-led ‘SOFR First’ initiative and have also been engaged with authorities across Libor jurisdictions to build the necessary consensus around the subsequent initiative for cross-currency swaps in September. Support for this has also been expressed publicly by the US Alternative Reference Rates Committee and the National Working Group on Swiss Franc Reference Rates.

In light of this, the FCA says it has engaged with UK market participants, including liquidity providers and interdealer brokers (IDBs), to determine support for a change in the quoting conventions of Libor cross-currency swaps in the interdealer market on the proposed date of 21 September.

It adds that a survey of UK market participants identified strong support for a change in the interdealer quoting convention, which would see RFRs rather than Libor become the default price.

“The FCA and the Bank of England therefore support and encourage all participants in the Libor cross-currency swaps market to take the steps necessary to prepare for and implement these changes to market conventions on 21 September and shift liquidity away from LIBOR to RFRs,” they say in a statement. “In the period leading up to 21 September, the FCA and the Bank of England will continue to engage with market participants and relevant international authorities to determine whether market conditions allow the switch to proceed smoothly.”