LIBOR is being wound down and there are now clear end dates for all of the LIBOR panels. Here we explain what firms need to know about LIBOR transition.
A key consideration of LIBOR transition is balance sheet exposure and how affected firms can move their stock of LIBOR linked contracts to alternative risk-free rates – see our September 2018 Dear CEO letter[1] to the UK’s largest banks and insurers for information.
In addition, even if you establish your firm has no balance sheet exposure, you may still be exposed to other risks from LIBOR transition. We therefore expect Boards and senior managers to put necessary arrangements in place to identify their firms’ exposures to LIBOR and to ensure their transition away from LIBOR does not harm their clients or how markets operate. See more information on other considerations and an explanation of potential conduct risks associated with LIBOR transition.
Firms should conduct an end-to-end inventory of LIBOR exposure. This should cover the full range of processes and systems, including for example (where relevant), pricing, valuation, risk management and booking. It should also cover contracts with clients, counterparties, creditors, employees, suppliers and others. These may include in-house or ancillary systems and where third-party vendors provide critical systems, firms should get assurance on timely software upgrades in order to use alternative rates.
Where you identify LIBOR transition will affect the finances and product choices available to your clients or require a contract amendment or renegotiation, we expect firms to treat clients fairly and to communicate with them in a clear and timely manner. As part of this communication you should:
- take care in describing to the customer the risks associated with LIBOR ending and how it will affect them
- be aware that there is a risk that some customers may not fully understand the implications
Firms should also familiarise themselves with the LIBOR transition path[2] and accompanying statement[3] outlined by the Working Group on Sterling Risk Free Reference Rates (RFRWG) which is supported by both the FCA and Bank of England. Your organisation should consider how it can usefully adopt the RFRWG milestones[2], which have been updated for 2021.
We will continue to monitor LIBOR transition across sectors. If your firm is a regular user of, or has material exposure to, LIBOR-referencing financial instruments and would like to make us aware of any potential concerns, contact us via the Supervision Hub[4].
The above information and actions should be considered by all firms. The additional information below is relevant for specific firms based on the activities they undertake. This page will be periodically updated with information for affected firms. Continue to check here regularly to see what the move away from LIBOR means for your firm.
- Asset management
- Benchmark administration
- Corporate finance (and similar) advice
- Custody services provision
- Insurers
- Principal trading
- Wholesale brokerage
Asset management
We wrote a Dear CEO Letter to all UK regulated asset management firms in February 2020[5] with our expectations as they prepare for the end of LIBOR.
If you conduct asset management related activity, we expect your firm to take all reasonable steps to ensure the end of LIBOR does not lead to market disruption or negatively affect consumers, and we also ask that you continue to support industry initiatives to ensure a smooth transition.
Benchmark administration
As a Benchmark administrator, you could cause disruption to markets by poorly managing the recalculation of benchmarks that rely on LIBOR or the new alternative risk-free rates. This can particularly affect users if they are unclear on how administrators will stop or recalculate benchmarks, especially where there is a lack of alternative benchmarks.
If you administer benchmarks which reference LIBOR or LIBOR-related products, or use LIBOR in the operation of your business, you will need to make changes to transition to alternative rates and communicate your transition plans clearly and appropriately to your users.
Corporate finance (and similar) advice
If your firm advises on capital market transactions that involve LIBOR-referencing products, please be fully aware that LIBOR is being wound down and communicate to your clients that they must transition to alternative rates.
Custody services provision
If your firm provides custody services, you should ensure products, activities and systems are adapted to support clients’ transition to alternative rates. We expect depositaries and trustee firms to oversee funds effectively through LIBOR transition, ensuring valuations are accurate and liquidity is sufficient to meet redemptions.
Insurers
If your firm has LIBOR exposures or dependencies through either in-house or third-party investment managers, you should take reasonable steps to ensure they have plans in place to reduce these exposures or transfer to alternative reference rates in a timely manner. Firms should consider industry timeframes and the risks associated with LIBOR products. They should also ensure that the firms’ valuation systems are adapted to support the transition to alternative rates.
In addition, firms should ensure that any impacts on products are thoroughly assessed and any risks to policyholders appropriately mitigated.
Principal trading
If your firm transacts in financial instruments as principal, it may have balance sheet exposure to LIBOR-referencing financial instruments and will require careful transition planning to ensure these exposures are wound-down or transferred to alternative reference rates in a timely manner.
We encourage firms to engage with the ISDA Protocol and market infrastructure providers to keep informed of transition timing and fallback arrangements for the LIBOR-referencing financial instruments they transact in, as these may differ by instrument type or market infrastructure provider.
Wholesale brokerage
If your firm carries out wholesale broking activity, it may have balance sheet exposure to LIBOR-referencing financial instruments. Whilst the standard activities of name give-up and matched principal broking models do not typically lead to significant balance sheet exposure, if your firm provides client intermediation services, such as listed derivatives clearing or prime brokerage, it may carry exposure.
This LIBOR exposure can arise directly from the products intermediated and/or indirectly through LIBOR references in contracts with clients, prime brokers and/or central counterparties (CCPs), for example interest paid on margin held. Where this is the case, you should communicate to your clients your plans to transition these exposures and references to alternative rates in a timely manner.