Thanks to productive collective action by the private sector in dialogue with U.S. and international authorities, an initial set of 18 GSIBs and other large dealer banks have adhered to the 2014 International Swaps and Derivatives Association (ISDA) resolution stay protocol covering OTC bilateral derivatives in connection with last year’s G-20 summit. Under the protocol, counterparties agreed to the cross-border enforceability of existing statutory stays on resolution-related early termination and other default rights in OTC bilateral derivatives contracts. With support from the U.S. and other key jurisdictions, the FSB subsequently called on all GSIBs and other firms with significant derivatives exposures to adhere to the protocol by the end of 2015. In addition, the FSB requested that such contractual terms be incorporated into other financial contracts with resolution-related termination features−such as contracts relating to repo and securities lending arrangements. This goal has been accomplished this past week, and represents another positive milestone in improving cross-border resolvability. Importantly, both the proposed U.S. long-term debt requirement and provisions in the resolution stay protocol support resolution under both Title I and Title II of the Dodd-Frank Act. While we should recognize the extent of progress that has been made to set the basic foundations for the cross-border resolution of a GSIB, it is equally important in my view to recognize the significant challenges that still remain, and the important work that still needs to be carried out by both firms and authorities.
And from the end of March this year, the majority of new GBP Libor business should have ceased, further shifting demand to those increasingly deep and liquid risk-free rate markets. New sterling floating rate note issuance has almost exclusively referenced SONIA for some time. In the sterling swap market, the share of SONIA-referencing swaps has regularly dominated the Libor equivalent for 10 months now[1], with continued progress since the ‘SONIA-first’ interdealer quoting convention switch last year. [2] Indeed, the dealer to dealer market has completed a transformation in risk traded with SONIA in excess of 70% vs. Libor, with progress across all tenors. If we remove the direct market element and focus on pure inter dealer market, we estimate this is now in excess of 90% SONIA. [3] These positive developments in linear derivatives (e.g. interest rate swaps) have filtered through into more complex derivative markets, with SONIA swaptions, caps and floors widely available and infrastructure being put in place to support these products. Today is a further landmark, with another ‘SONIA first’ initiative as the interdealer market looks to shift liquidity in these more complex non-linear products from Libor to SONIA ahead of the upcoming end-Q2 milestone to cease new Libor linked issuance. [4] This is not to say there is an outright ban on trading Libor in nonlinear sterling markets after this milestone.