The Situation: The LIBOR manipulation scandal
and vanishing liquidity in the London inter-bank market for time
deposits led the Financial Conduct Authority ("FCA") to
announce that at the end of 2021, banks would no longer be required
or compelled to submit for a daily fixing of LIBOR. Market
participants have started transitioning to the use of more secure
benchmarks, for example, the Sterling Overnight Index Average
("SONIA").
The Action: The Bank of England
("BoE") has initiated a review of its own exposures to
LIBOR transition, with one key area being the collateral that banks
and other financial firms are required to provide when borrowing
from the BoE under the Sterling Monetary Framework
("SMF"). Issues arise when the
collateral that is being offered by the borrower references GBP
LIBOR and other indices at significant risk of termination at
year-end 2021 (or otherwise). In fact, roughly a tenth of the
banks' SMF drawing capacity is collateralized by
