Providers Present Possible New Term Reference Rates

Shanny Basar

Three potential providers have expressed an interest in developing a forward-looking term rate to a working group at the Bank of England as the financial industry aims to transition from Libor.

Tushar Morzaria, Barclays

The UK central bank published the minutes from May of the Working Group on Sterling Risk-Free Reference Rates, led by Barclays’ Tushar Morzaria, on its website this week. The working group is made up of experts from large sterling swap dealers and discusses the development of sterling risk-free reference rates.

After the financial crisis there were a series of scandals regarding banks manipulating their submissions for setting benchmarks across asset classes, which led to a lack of confidence and threatened participation in the related markets. As a result, regulators have increased their supervision of benchmarks and want to move to risk-free reference rates based on transactions, so they are harder to manipulate and more representative of the market. The UK has chosen the sterling overnight index average, Sonia, as its new risk-free rate.

The Financial Conduct Authority said two years ago that it will not compel panel banks to submit to Libor beyond 2021.


The UK regulator told the Bank of England working group that three potential providers had expressed an interest in developing a forward-looking term rate.

FTSE Russell, owned by the London Stock Exchange Group, ICE Benchmark Administration and Refinitiv (since acquired by LSEG) – were invited to present to the working group. The minutes said: “Working group members were reminded that these presentations were not formal considerations to determine a provider, but simply an opportunity for interested providers to present to an informed audience and seek comments.”

Waqas Samad, LSEG

Waqas Samad, chief executive of FTSE Russell and group director of iInformation services division at LSEG delivered the presentation from FTSE Russell, Tradition and TP Icap.

“FTSE Russell drew similarities between the discontinuation of Libor and that of the gilt pricing index, noting that the rate submitters in the gilt index withdrew support and FTSE Russell and Tradeweb took responsibility of publishing these prices,” said the minutes. “FTSE Russell recognised that a forward-looking term-rate should only be adopted where appropriate, and noted use cases would likely include cash products, treasury and funding operations.”

ICE Benchmark Administration’s presentation was delivered by president Timothy Bowler.

The minutes said: “IBA shared intentions to publish a Term Sonia Reference Rate alongside Libor, and would be seeking market feedback on the trading window for TSRR settings and when the rate should be published to further facilitate transition.”

IBA proposed three potential calculation methodologies to develop a forward-looking term rate; overnight index swap-based, futures based or a hybrid model of both OIS and futures which would capture both activity and executable quotes.

The presentation from Refinitiv was delivered by Robert Walton, and Stephan Flagel and supplemented by a presentation by Bhas Nalabothula of Tradeweb. Refinitiv is an administrator for approximately 30 Iosco and EU compliant benchmarks and is already regulated by the FCA through a subsidiary.

The minutes said: “Refinitiv noted that whilst the development of a Term Sonia Reference Rate would aid transition to Sonia in the near-term, only a small part of the market may benefit from a forward-looking term structure in the long-term, suggesting that term rates would have a limited-use application and would certainly assist transition in the short-term, but may not need to be available permanently.”

Refinitiv noted that the best and most robust Term Sonia Reference Rate would currently be derived using executable OIS quotes from a central limit order book, due to the amount of information in quotes (i.e. market expectation), and the prevalence of a more liquid forwards market.

The minutes continued that the FCA has called major liquidity providers in the market and set out that a step change is required to help facilitate the creation of a Term Sonia Reference Rate through streaming executable OIS quotes to multilateral trading facilities.

Transition progress

Regulators have been pushing firms to begin transitioning to  the new risk-free rates as soon as possible, without waiting for term rates to be fully developed.

John Williams from the NY Fed has encouraged market participants to begin using SOFR. The US has adopted the secured overnight financing rate, SOFR, as its risk-free rate.

Cornelia Holthausen from the European Central Bank also explained the need for benchmark rates in a video:

However, last month consultancy Oliver Wyman said in a report that a huge amount of work still remains to transition the $240 (€214) trillion US dollar Libor market to alternative risk-free rates before Libor stops being published. The consultancy said banks need to stop procrastinating and develop loan products based on risk-free rates, despite only backward-looking RFRs currently being available.

“Banks cannot afford to wait due to the lead time to transition legacy contracts,” said the report. “Without proper preparation, banks face a number of material risks that include unanticipated operational risks, potential value transfers which can lead to huge gains or losses when fallback clauses come into force, and considerable conduct risk that could result in reputational damage, fines, and lawsuits.”

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