Fixed Income Pulse: LIBOR Transition - Update for Issuers and Market Participants

  • Regulators have made the need to transition away from the use of £-LIBOR as a benchmark clear
  • Market participants with exposure to £-LIBOR must now be preparing comprehensive transition strategies to be ready for the phasing out of £-LIBOR
  • LSEG remains committed to supporting our clients through this transition and offers a suite of products designed to assist market participants in their transition from £-LIBOR to SONIA

This bulletin provides issuers and market participants with an update on recent developments related to the transition from £-LIBOR* to SONIA. It also looks at trends in recent issuance, services from London Stock Exchange Group (“LSEG”) that will assist participants manage this transition and expectations of London Stock Exchange issuers with listed bonds that reference £-LIBOR that have maturities past 2021.
 
Recent developments on the LIBOR transition
In 2017 the Sterling Overnight Index Average (“SONIA”) was recommended by the Working Group on Sterling Risk-Free Reference Rates (“RFRWG”) as the preferred risk-free rate for Sterling. The RFRWG has since been focused on the transition to SONIA, including through the publication of a roadmap and top-level priorities.
 
Market participants will be aware that the FCA has a voluntary agreement in place with LIBOR panel banks to continue to provide LIBOR submissions until end-2021. This means it is possible that LIBOR publication could cease at any time from early 2022 onwards. As that time period steadily approaches, London Stock Exchange believes it is important that market participants have a comprehensive LIBOR transition strategy in place. Regulators have made clear that market participants with exposure to LIBOR should be taking steps to ensure they have adequate transition strategies in place ahead of a possible LIBOR discontinuance after end-2021.
 
In this context, the RFRWG has also stated in their recently published roadmap and top-level priorities, that “by end-Q1 2021, lenders and borrowers should take necessary steps to cease issuance of LIBOR linked loan products that expire after the end of 2021”. The RFRWG  goes on to make clear this should include “making non-LIBOR alternatives available and including contractual conversion mechanisms in new or refinanced LIBOR products” by the end of Q3 2020. 
 
Supporting participants through the LIBOR transition
As a diversified financial markets infrastructure business, LSEG can help support market participants in the transition from LIBOR to SONIA, through its unique position across the trading life cycle: 

  • LCH, part of LSEG’s Post Trade division, offers cleared SONIA interest rate swaps in both one-month and three-month tenors. LCH has been clearing SONIA swaps for over 10 years and has cleared more than £50 trillion of SONIA swaps in H1 2020
  • CurveGlobal Markets, the derivatives segment of London Stock Exchange plc, offers one-month and three-month SONIA futures which are cleared at LCH. Within LCH SwapClear, participants have the ability to portfolio margin their exchange traded and OTC products. CurveGlobal Markets was the first exchange to offer three-month SONIA futures The innovative inter commodity spreads (“ICS”) are also available, which allow members to trade the SONIA yield curve and the SONIA-LIBOR basis without legging risk. In May 2020, CurveGlobal Markets published its confirmed approach for managing the impact of the LIBOR transition on its LIBOR-linked futures.
  • FTSE Russell, part of LSEG’s Information Services Division, has recently launched indicative term SONIA reference rates to help the industry transition from LIBOR.

For more information on LCH, CurveGlobal, or FTSE Russell’s SONIA products, please visit their respective websites or contact us.
 
Market trends related to bonds admitted to London Stock Exchange 
Since 2019, the number of bonds admitted to London Stock Exchange and amount raised with reference to SONIA significantly exceeded that referenced to LIBOR. Through July 2020, $14.2 billion of newly issued bonds on London Stock Exchange markets were benchmarked to SONIA compared to $1.37 billion benchmarked to LIBOR.

SONIA VS LIBOR (£) - New Issuances on London Stock Exchange markets


Source: Dealogic, July 2020 (Figure 1)

The small number of £-LIBOR-linked Floating Rate Notes (FRNs) that have been issued in 2020 are relatively short in tenor (with the longest dated bonds maturing in 2025).
 
Considerations for London Stock Exchange issuers
A structural shift towards SONIA-linked debt issuances is well underway, however issuers should also be considering what measures are necessary to address debt issuances linked to LIBOR with maturities beyond 2021, which may include contractual conversion mechanisms.   
 
At the same time, the UK government has recently announced measures which would in certain limited cases address the issue of “tough legacy” contracts that cannot transition away from LIBOR. The UK government also reiterated in the same announcement, and as was initially made clear by the RFRWG in its Tough Legacy report, the primary focus of market participants should be ensuring an active transition away from a reliance on LIBOR wherever possible.
 
It is for each for market participant to assess the implications of these developments against their own business activities, and in particular for those issuers with notes benchmarked to LIBOR. 
 
From the perspective of London Stock Exchange as an operator of a regulated market and multilateral trading facility for bonds, we expect issuers with debt issuances linked to LIBOR, particularly with maturities past 2021, to be communicating with their investors in a manner that is “clear, fair and not misleading”, giving stakeholders sufficient time to make informed decisions about the associated risks of still being exposed to LIBOR beyond 2021.
 
For further guidance on what issuers should be doing to prepare for the transition please see the FCA’s official guidance published in Q&A format here.
 
Please visit our website or reach out via bonds@lseg.com or +44 (0)207 797 3921 if you have any questions on listing debt or debt-like instruments on London Stock Exchange’s fixed income markets or any questions on this bulletin. 

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