The FCA and the Bank of England are encouraging liquidity providers to use Sterling Overnight Index Average (SONIA), instead of London Interbank Offered Rate (LIBOR), as a basis for inter-dealer trading in sterling non-linear derivatives from 11 May this year. This change will help to meet a key milestone, recommended by the Working Group on Sterling Risk-Free Reference Rates, of stopping the issuing of new GBP LIBOR-linked non-linear derivatives expiring after 2021 by the end of Q2 2021.
This change comes following a similar change for linear sterling swaps during Q4 2020. The change has strong support amongst market participants (the FCA surveyed 22 participants, of which 100% supported this change and 95% felt 11 May 2021 was an appropriate date for the change).
Whilst this change is unlikely to require any immediate action by our Duff & Phelps clients, it will have an impact on them if any of their products are linked to sterling non-linear derivatives whose basis may change in the future.
The full text of the FCA’s statement can be found here.