28 July 2021 – The FICC Markets Standards Board (“FMSB”) today publishes the finalised Standard on use of Term SONIA reference rates.
The Standard was initially published as a Transparency Draft on 24 March 2021. Since its publication, UK regulators have provided supportive references to the Standard, including in a joint PRA / FCA Dear CEO letter on Transition from LIBOR to Risk Free Rates stating that firms should consider this Standard in selecting benchmarks, as well as in a recent speech by the Governor of the Bank of England (Descending safely: Life after Libor – speech by Andrew Bailey | Bank of England).
Certain minor changes have been made to the final Standard in response to comments received during the Transparency Period, such as clarifying the relationship between the Standard and applicable benchmark regulations. However, the FMSB Working Group determined that no changes were required to be made to the proposed ‘use cases’ for Term SONIA.
SONIA is the Sterling Overnight Index Average, as published by the Bank of England, and Term SONIA refers to forward-looking benchmarks.
The UK authorities and the Working Group on Sterling Risk-Free Reference Rates have made clear they expect the use of such forward-looking benchmarks to be relatively limited. Instead, the expectation is that Sterling fixed income and wholesale lending markets should predominantly transition to SONIA compounded in arrears as part of the move away from LIBOR.
However, there will be some circumstances where the use of a rate compounded in arrears is not appropriate or operationally achievable. This Standard has therefore been developed with the aim of identifying where there may be robust rationales for using Term SONIA and sets out certain expected behaviours of market participants.
This Standard applies to participants in the Sterling fixed income and wholesale lending markets, including Sterling legs of multi-currency products.
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Notes to Editors
1) The Fixed Income, Currencies and Commodities Markets Standards Board (‘FMSB’) is practitioner led, funded by members and operated by the major participants in wholesale markets to improve standards of conduct in wholesale fixed income, currencies and commodities (FICC) markets. It aims to bring transparency to grey areas in the wholesale FICC markets by identifying emerging vulnerabilities, clarifying and documenting practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective for all participants is at the heart of FMSB’s mission.
FMSB Standards set out Core Principles and accompanying guidance on the most important aspects of practice where ambiguity risks undermining the transparency, fairness and effectiveness of markets.
FMSB Statements of Good Practice set out clear expectations and guidance on good practice in relation to broader areas of uncertainty in wholesale FICC markets.
FMSB Spotlight Reviews encompass a broad range of publications used by FMSB to illuminate important emerging issues in FICC markets. Drawing on the insight of members and industry experts, they provide a way for FMSB to surface nascent challenges market participants face and may inform topics for future work. Spotlight Reviews will often include references to existing law, regulation and business practices. However, they do not set or define any new precedents or standards of business practice applicable to market participants.
All FMSB publications are available on the FMSB website at fmsb.com/our-publications/.
2) Setting up the FMSB was one of the main recommendations from the Fair and Effective Markets Review (FEMR), which was conducted by HM Treasury, the Bank of England, and the Financial Conduct Authority.
FEMR set FMSB four strategic goals:
- Identifying global market vulnerabilities through scanning the horizon for emerging business practice risks.
- Developing best market practice through the production of standards and other materials that create a common understanding.
- Driving global adherence through ensuring standards are comprehensible and practical.
- Developing consistent approaches to market practices through identifying gaps and inconsistencies in existing regulatory standards and working with other standards setting bodies.
3) FMSB has a Standards Board drawn from senior executives from across wholesale markets, from corporate clients, asset managers, sell-side participants and intermediaries and infrastructure providers such as exchanges and custodians. In specialist, focused committees, subcommittees and working groups, industry experts debate issues and develop FMSB Standards and Statements of Good Practice, and undertake Spotlight Reviews that are made available to the global community of FICC market participants and regulatory authorities.
4) FMSB members bring together sell-side investment banks, buy-side asset managers, market infrastructure providers and exchanges, custodians and users of the market such as corporates. This constitution is unique.
The member firms are listed and available on the FMSB website at fmsb.com/who-we-are/