At present, roughly a tenth of banks’ drawing capacity is collateralised by assets referencing sterling LIBOR. Those assets include: securities paying a LIBOR-linked coupon; securitisations with embedded LIBOR-linked swaps; and LIBOR-linked loans, in either raw or securitised form. The risk is that, absent appropriate planning, these assets could become increasingly difficult for the Bank to value, risk manage and service as LIBOR cessation approaches. These are activities the Bank must be able to perform in case we have to take that collateral onto our balance sheet in a firm default, in order to protect public funds. A precipitate response to such risks could create a sudden ‘cliff edge’ reduction in drawing capacity, impairing the availability of effective liquidity insurance at a possibly critical moment. In order to avoid this risk and ensure that firms’ borrowing capacity at the Bank is managed progressively through the LIBOR transition period, we are announcing a new policy for LIBOR-linked collateral to allow firms to plan ahead. There are two key elements, summarised in Figure 4:  -  First, from 2020 Q3, we will progressively increase the haircuts on LIBOR-linked collateral pre-positioned with us. Haircuts are scheduled to reach 100% (i.e. implying effective ineligibility) at the end of 2021. -  Second, and in line with the Working Group’s 2020 Q3 target for no new term LIBOR loan issuance, any LIBOR linked collateral issued after October 2020 will be ineligible for use at the Bank.
We are working to identify and remove any unnecessary regulatory obstacles to transition, and clarify supervisory expectations.8 And we help provide international liaison and leadership through the Financial Stability Board’s Official Sector Steering Group, co-chaired by Andrew Bailey and John Williams. 6  www.fca.org.uk/news/speeches/next-steps-transition-libor www.bankofengland.co.uk/-/media/boe/files/financial-policy-summary-and-record/2019/december-2019.pdf See for instance www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2019/prudential-regulatory-framework-andlibor-transition.pdf and www.fca.org.uk/markets/libor/conduct-risk-during-libor-transition 7 8  3  All speeches are available online at www.bankofengland.co.uk/news/speeches  3  It is in that spirit that I want today to announce two new initiatives aimed at further supporting LIBOR transition:  -  First, and in direct response to feedback from market practitioners, the Bank is intending to publish a compounded SONIA index from July 2020. Complementing our existing overnight SONIA rate, the index will provide a flexible tool to help market participants construct compounded SONIA rates in an easy and consistent way, supporting achievement of their 2020 Q3 target for new issuance. -  The second relates to the Bank’s own lending operations for banks and other financial intermediaries. From October this year, we will begin increasing haircuts progressively on LIBOR-linked collateral we lend against. This will give firms the time they need to replace that collateral with risk free rate alternatives, ensuring their borrowing capacity is maintained while also protecting public funds. This approach reflects the clear preferences of respondents to our discussion paper last year.9  These initiatives are aimed at turbo-charging sterling transition, helping the market deliver against its commitment to transition away from LIBOR and further de-risking sterling markets.