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Summary of Conversation with the FCA – Latest on the Sterling LIBOR Transition

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We are currently witnessing the most significant transformation in interest rate markets, if not all markets, that we will most likely see in our lifetimes. After almost four years of preparation for the cessation of LIBOR, the amount of work needed to be done at times seemed insurmountable. But now with only six months until the deadline in which LIBOR panels cease for GBP, JPY, CHF and EUR and new risk transitions for USD markets, we are on the final stretch. It is due to the tireless efforts and close collaboration between the official sector and market participants, both in the UK and across many other jurisdictions, that has enabled us to get where we are today.

As the LIBOR deadline draws closer and with various other updates and changes on the horizon, Tradeweb hosted a “The Year Ahead in Derivatives Trading” virtual event to hear from regulators and other market participants first hand. Toby Williams, Technical Specialist, Benchmarks Policy,  Markets & Wholesale Policy Department at the FCA, provided us with the latest progress made on the transition from LIBOR to SONIA as our Keynote Speaker.

‘SONIA-First’ initiative

In order to help ensure a well-developed SONIA derivatives market on the first day of 2022, work has been underway to build liquidity in compounded SONIA derivative products. As a result, the FCA and the Bank of England have coordinated with industry on recommending a series of industry milestones. These, so called, ‘SONIA-First’ initiatives have provided a clear roadmap to support the development of deep and liquid derivative markets and in facilitating a smooth and orderly transition.

  • The initial ‘SONIA-First’ initiative, designed to speed up the shift from new trading of Sterling LIBOR swaps across to SONIA swaps in the linear market, started on 27th October 2020. Progress has been very impressive with estimates of new swap flow tripling over the past 6 months. At the end of last quarter, all outright swaps in the dealer-to-dealer broker market are now being done against SONIA, with LIBOR now only being traded via single currency basis swaps in the interdealer market;
  • The next step in establishing the SONIA ecosystem was the ‘SONIA-First’ switch for non-linear derivatives starting on 11th May 2021. Initial progress has been very impressive, as preliminary reports have shown that by the end of the first week all interests and trades in the interbank non-linear market were in SONIA, with none in LIBOR;
  • The SONIA futures market is developing well, with around a quarter to a third of volumes now in SONIA. In order to further complete the SONIA ecosystem, the switch for the ‘SONIA-First’ for exchange traded derivatives has been announced for the 17th June, just ahead of the end of Q2 RFRWG milestone to cease initiation of new GBP LIBOR exchange traded derivatives expiring after 2021. That end of Q2 milestone was specifically called out in the Bank and FCA’s recent “Dear CEO/SMF” letter. Due to the more diverse nature of the exchange traded derivatives market, regulators cast the net wider than the other initiatives to include banks, futures liquidity providers, trend followers and exchanges.


The CFTC’s Market Risk Advisory Committee (MRAC) Interest Rate Benchmark Reform Subcommittee recommended a similar change in the USD markets with a “SOFR First” initiative. SOFR First – modeled after SONIA First - is a best practice to prioritize interdealer markets of trading of SOFR instead of LIBOR starting on 26th July 2021. This should improve liquidity in SOFR and increase both dealer to dealer and dealer to client trading activity. End users will still be allowed to trade LIBOR swaps on dealer to client platforms such as Tradeweb after the SOFR first date.

The time to act is now

As the countdown on LIBOR's 'final chapter' continues to progress, market participants need to continue to stay engaged and successfully complete their transition plans. Resources around legal, IT and consultancy costs need to be earmarked, and firms relying on market transactions to complete transitions need to be aware that if liquidity in LIBOR instruments diminishes, it will become more difficult and expensive to transition. If they have not done so already, supervised entities are encouraged to sign up to the ISDA protocol, as one to meet BMR requirements to have robust fallbacks in place.

Considering that this is the most significant transformation in interest rate markets that we will see in our lifetimes - it is crucial firms do this properly.

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