FCA & BoE Push Liquidity Providers to Adopt New Quoting Conventions

The Financial Conduct Authority (FCA) and the Bank of England (BoE), recently announced that they support and encourage liquidity providers in the sterling swaps market to transition from quoting LIBOR to SONIA from the 27th of October 2020.

After engaging with market participants, the FCA and BoE said on Monday that they want liquidity providers in the sterling swaps market to adopt new quoting conventions for inter-dealer trading based on SONIA.

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According to the statement, the two financial institutions want to facilitate the further shift in market liquidity toward SONIA swaps, with the cessation date of the LIBOR benchmark set for the end of 2021.

The support from the FCA and BoE follows a survey sent to market participants, based on the recommendation for the Working Group on Sterling Risk-Free Reference Rates that a key milestone for moving away from LIBOR is to cease initiation of new GBP LIBOR linked linear derivatives expiring after 2021, by the end of the first quarter of 2020, except for risk management of existing positions.

COVID-19 delays FCA and BoE initiative

Although it is now well past the first quarter of 2020, the FCA highlighted that a previously planned initiative to accelerate a change in quoting convention was planned for March 2020, however, the coronavirus pandemic prevented this from occurring. 

“In support of this milestone, the FCA has engaged with interest rate swap liquidity providers as well as interdealer brokers to determine support for a change in the quoting conventions of sterling interest rate swaps in the interdealer market,” the regulator said in a statement on Monday.

“An FCA survey of liquidity providers identified strong support for a change in the interdealer quoting convention that would see SONIA rather than LIBOR become the default price from 27 October 2020, subject to prevailing market conditions at that time.”

Specifically, liquidity providers were asked whether a ‘SONIA-First’ Convention Switch for derivative trading be attempted in which 95 per cent of the 20 respondents replied with Yes. 89 per cent of respondents who selected Yes, also supported the 27th of October 2020 as an appropriate switch date.

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