The Bank Of England’s Risk Management Approach To Collateral Referencing USD Libor For Use In The Sterling Monetary Framework - Market Notice 19 May 2022

Haircut add-ons

Pursuant to this Market Notice, a haircut add-on will be applied to all USD LIBOR Linked Collateral. The haircut add-on will be 10 percentage points from (and including) 1 October 2022, 40 percentage points from (and including) 1 March 2023 and 100 percentage points from (and including) 30 June 2023; provided that final haircuts will be capped at 100 per cent.

However, the Bank reserves the right to waive the USD LIBOR linked haircut add-ons applicable to USD LIBOR Linked Collateral where the Bank is satisfied (in its sole discretion) that such USD LIBOR Linked Collateral benefits from a robust fallback or a future rate switch mechanism that meets either or, where relevant, both of the following conditions:

1. the instrument or agreement that governs such USD LIBOR Linked Collateral (including the instrument or agreement that governs the underlying USD LIBOR Linked Loan(s) or swap(s)) is governed by US federal or state law, and none of the exceptions to the application of the US Adjustable Interest Rate (LIBOR) Act apply (as separately described in the relevant due diligence questionnaire related to this Market Notice); and/or
2. such USD LIBOR Linked Collateral (including the instrument or agreement that governs the underlying USD LIBOR Linked Loan(s) or swap(s)) satisfies each of the two conditions set forth below:
   1. the instrument or agreement that governs such USD LIBOR Linked Collateral (including the instrument or agreement that governs the underlying USD LIBOR Linked Loan(s) or swap(s)) ensures USD LIBOR will be replaced with a clearly specified alternative rate either:
      
      1. on a specific date no later than its first interest rate reset date occurring after 30 June 2023 (a ‘future rate switch’); or
      
      
      2. in the event that the relevant USD LIBOR setting ceases or is no longer representative of the underlying market and economic reality that it seeks to measure, as announced by the UK Financial Conduct Authority or, where applicable, by the Board of Governors of the US Federal Reserve System (a ‘fallback’); and
   2. such instrument or agreement clearly specifies the alternative rate to be adopted, including how this would be calculated and the applicable market conventions, as well as any required tenor or credit adjustment spread that may apply in relation to the calculation of the alternative rate.

For the avoidance of doubt, both condition (1) and condition (2) may be applicable in the case of some USD LIBOR Linked Collateral.

If, after the Bank has notified a participant in the SMF (an SMF Participant) of the Bank’s waiver of the USD LIBOR linked haircut add-ons, such SMF Participant becomes aware (i) that the replacement of USD LIBOR with the alternative rate has not taken, or will not take, effect or has failed, or will fail, to work as intended, or (ii) of any claim or intimation of claim by any person, or arising from any dispute, in relation to such replacement of USD LIBOR with an alternative rate, then such SMF Participant shall immediately notify the Bank of such circumstance. 

If the Bank notifies an SMF Participant that it has waived the applicable USD LIBOR linked haircut add-ons due to the SMF Participant relying on the application of the US Adjustable Interest Rate (LIBOR) Act, such SMF Participant must promptly notify the Bank of any amendments made to the US Adjustable Interest Rate (LIBOR) Act following the date of the Bank’s notification. 

The Bank reserves the right to re-assess eligibility of any USD LIBOR Linked Collateral at any time.

In respect of any Loan Portfolio containing both USD LIBOR Linked Loans and other loans, an SMF Participant may choose to either remove the USD LIBOR Linked Loans from such Loan Portfolio or, alternatively, split the Loan Portfolio subject to both meeting the Bank’s other collateral eligibility requirements.