This market notice (Market Notice) sets out the Bank's risk management approach to collateral referencing all LIBOR rates for use in the Sterling Monetary Framework. It forms part of the Documentation for the Bank of England’s (the Bank) operations under the Sterling Monetary Framework (SMF) and should be read in conjunction with the SMF Documentation, each as supplemented and amended from time to time. This Documentation is available on the Bank’s website. Any capitalised term used in this Market Notice and not otherwise separately defined herein, shall bear the same meaning as set out in the glossary to the SMF Terms and Conditions. This Market Notice supersedes the Market Notices published on 26 February 2020 and 07 May 2020. This Market Notice may be supplemented and amended from time to time.
Scope and definitions
Throughout this Market Notice, LIBOR refers to GBP LIBOR, 1-week and 2-month USD LIBOR settings, EUR LIBOR, JPY LIBOR and CHF LIBOR.
Throughout this Market Notice, LIBOR Linked Loans refers to loans maturing after 31 December 2021, where the borrower is currently paying, will revert to paying, or may be required to pay a rate of interest or any amount calculated by reference to LIBOR. A LIBOR Linked Loan Portfolio refers to Loan Portfolios where one or more loans in the portfolio is a LIBOR Linked Loan.
Throughout this Market Notice, LIBOR Linked Collateral refers to:
- LIBOR Linked Loan Portfolios;
- Collateral Securities where the coupon pays, will revert to paying or may be required to pay a rate of interest calculated by reference to LIBOR;
- Collateral Securities where embedded swap payments are calculated, will revert to being calculated or may be required to be calculated by reference to LIBOR; and
- Collateral Securities backed by loans where one or more loans in the portfolio is a LIBOR Linked Loan,
in each case, maturing after 31 December 2021.
For Collateral Securities, the maturity date will be deemed to be the final maturity date specified in the relevant governing documents.
Haircut add-ons
Pursuant to this Market Notice, a haircut add-on will be applied to all LIBOR Linked Collateral. The haircut add-on will be 10 percentage points from (and including) 1 April 2021, 40 percentage points from (and including) 1 September 2021 and 100 percentage points from (and including) 31 December 2021. For the avoidance of doubt, haircuts will be capped at 100 per cent.
The Bank reserves the right to waive the LIBOR linked haircut add-ons applicable to LIBOR Linked Collateral where it is satisfied (in its sole discretion) that such LIBOR Linked Collateral benefits from a robust fallback or a future rate switch mechanism that meets all of the following conditions:
i. the legal documentation governing the LIBOR Linked Collateral ensures LIBOR will be replaced with a clearly specified alternative rate either:
(a) on a specific date ahead of its first interest rate reset date occurring after 31 December 2021 (a ‘future rate switch’); or
(b) in the event that the relevant LIBOR setting ceases or is no longer representative of the underlying market and economic reality that it seeks to measure, as announced by the Financial Conduct Authority (FCA) on its website (a ‘fallback’); and
ii. the legal documentation governing the LIBOR Linked Collateral clearly specifies the alternative rate to be adopted, including how this would be calculated and the applicable market conventions, as well as any required credit adjustment spread that may apply in relation to the calculation of the alternative rate.
If, after the Bank has confirmed to a participant that any of its LIBOR Linked Collateral will not be subject to the scheduled LIBOR linked haircut add-ons, that participant becomes aware (i) that the replacement of LIBOR with the alternative rate has not taken, or will not take, effect or has failed, or will fail, to work as intended, or (ii) of any claim or intimation of claim by any person, or arising from any dispute, in relation to such replacement of LIBOR with an alternative rate, the participant shall immediately notify the Bank. The Bank reserves the right to re-assess eligibility of any LIBOR Linked Collateral at any time.
In respect of Loan Portfolios containing both LIBOR Linked Loans and other loans, participants may choose to either remove the LIBOR Linked Loans from the Loan Portfolios, or alternatively split these Loan Portfolios subject to them meeting the Bank’s other collateral eligibility requirements.
Eligibility
This Market Notice sets outs the following on the eligibility of LIBOR Linked Collateral:
- On and from 1st April 2021, all securities issued on or after that date and maturing after 31 December 2021, where the coupon pays, will revert to paying, or may be required to pay a rate of interest calculated by reference to LIBOR, will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch;
- On and from 1st April 2021, all securities issued on or after that date and maturing after 31 December 2021, where embedded swap payments are calculated , will revert to being calculated or may be required to be calculated by reference to LIBOR, will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch;
- On and from 1st April 2021, all securities issued on or after that date and maturing after 31 December 2021, backed by loans where one or more loans in the portfolio is a LIBOR Linked Loan that was originated after 1st April 2021, will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch;
- On and from 1st April 2021, all LIBOR Linked Loans issued on or after that date, will be ineligible for use in the SMF, regardless of whether they contain a robust fallback or a future rate switch; and
- On and from 1 January 2022, all LIBOR Linked Collateral, regardless of the issuance or origination date, will be ineligible for use in the SMF with the exception of LIBOR Linked Collateral that has been provided to the Bank prior to 1 January 2022 and which benefits from a future rate switch mechanism that meets, and continues to meet, all of the conditions set out in this Market Notice in addition to the Bank’s other eligibility requirements.
Except as described above, participants may otherwise request to provide LIBOR Linked Collateral until 31 December 2021, subject to the conditions set out in this Market Notice and the Bank’s other collateral eligibility requirements. .
Overnight, 1-month, 3-month, 6-month and 12-month USD LIBOR settings (“Remaining USD LIBOR Settings”)
Since the publication of the Bank’s Market Notice on 07 May 2020, the FCA confirmed an updated transition timeline for the Remaining USD LIBOR Settings. The Bank is reflecting on this and will decide how to take account of this in its approach to Collateral referencing the Remaining USD LIBOR Settings for use in the SMF, including any applicable haircut add-ons and the conditions under which the Bank reserves the right to waive the haircut add-ons. In the meantime, Collateral referencing the Remaining USD LIBOR Settings will not be subject to the scheduled haircut add-ons set out above unless such Collateral also references one or more of the other LIBOR rates.
On 30 November 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued a statement which notes ”the agencies encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, in order to facilitate an orderly—and safe and sound—LIBOR transition. New contracts entered into before December 31, 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR's discontinuation.”
In line with that statement, the Bank will not accept any Collateral referencing the Remaining USD LIBOR Settings that is issued on or after 1 January 2022.
Furthermore, Collateral referencing the Remaining USD LIBOR Settings that is issued on or after 1 April 2021 and before 1 January 2022 will not be eligible unless the Bank is satisfied (in its sole discretion) that such Collateral benefits from a robust fallback or a future rate switch mechanism that meets all of the following conditions:
i. the legal documentation governing the Collateral ensures the Remaining USD LIBOR Settings will be replaced with a clearly specified alternative rate either:
(a) on a specific date ahead of its first interest rate reset date occurring after 30 June 2023; or
(b) in the event that the relevant Remaining USD LIBOR Setting ceases or is no longer representative of the underlying market and economic reality that they seek to measure, as announced by the Financial Conduct Authority (FCA) on its website; and
ii. the legal documentation governing the Collateral clearly specifies the alternative rate to be adopted, including how this would be calculated and the applicable market conventions, as well as any required credit adjustment spread that may apply in relation to the calculation of the alternative rate.
If a participant becomes aware (i) that the replacement of Remaining USD LIBOR Setting with the alternative rate has not taken, or will not take, effect or has failed, or will fail, to work as intended, or (ii) of any claim or intimation of claim by any person, or arising from any dispute, in relation to such replacement of the relevant Remaining USD LIBOR Setting with an alternative rate, the participant shall immediately notify the Bank. The Bank reserves the right to re-assess eligibility of any Collateral referencing a Remaining USD LIBOR Setting at any time.
Eligible securities impacted
Please refer to this list of eligible securities that are impacted by this policy. The Bank updates this list on a monthly basis.
The Bank may, in its sole and absolute discretion, disapply or vary the terms of the policy set out in this Market Notice in relation to any Collateral referencing LIBOR or a Remaining USD LIBOR Setting and/or any one or more participants.