A taskforce belonging to the Financial Conduct Authority and Bank of England's Working Group on Sterling Risk-Free Reference Rates has shed more light on the problems of 'tough legacy' issues that are bound to hamper the UK's transition away from the scandal-struck London Interbank Offered Rate to other rates.

Bonds

The fallback provisions in existing bonds (that were issued with Libor in mind) are problematic because:

• in a small number of cases they do not exist;
• they do not contemplate the permanent discontinuation of Libor and ultimately rely on the application of the last available Libor fix for the remainder of their lives; and
• they involve the exercise of discretion within certain parameters, which may not be straightforward.

The working group wants market participants to move or 'transition' their old bonds away from Libor and towards SONIA (the Sterling Overnight Index Average which the Bank of England administers) actively wherever possible. Its Cash Market Legacy Transition Taskforce is going to produce some materials to support this.

Bonds issued before 2017 usually have 'fallback' to a fixed rate; some post-2017 contracts allow transition to an alternative reate, but involve the exercise of discretion on that rate. Some securitisations have outstanding call options and some are retained transactions. Some more recent securitisations have negative consent language which is intended to make amendment easier. Consent solicitation is possible for some bonds but probably not for all and there are high consent thresholds. Some bonds are widely held and there will not be enough time to 'transition' all affected bonds by consent solicitation. In some cases, the sponsor for a securitisation or repackaging may no longer exist or might have gone insolvent, so no decision maker or party will be willing to pay the costs of amending the contract.

Fresh legislation?

The taskforce is only too painfully aware that it is not within its remit to frame legislation. It knows that there are many other calls on the Government's time and that even if new legislation were to appear to sort these problems out, the laws of other nations might not fit it. On the positive side, in this arena and throughout financial regulation in general, the UK is a rule-maker and not a rule-taker.