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    APRA Publishes Feedback on Preparation for LIBOR Transition

    April 08, 2020

    APRA published feedback on the preparations for London Interbank Offered Rate (LIBOR) transition by institutions in Australia. The Australian Securities and Investments Commission (ASIC) released this feedback on responses from selected major Australian financial institutions that detailed their respective entities' preparation for the end of London Interbank Offered Rate (LIBOR). This initiative is supported by both APRA and the Reserve Bank of Australia (RBA). The feedback includes general assessment of the transition preparations, related recommendations, and a plan for ongoing engagement on these issues. The regulators recognize that disruptions from the COVID-19 outbreak may affect the timing of some aspects of the transition plans of institutions.

    The CEOs of selected major Australian financial institutions received a letter from regulators in May 2019, to which the institutions had responded in July 2019, providing the regulators with information on the transition preparations. Institutions that responded to the letter have been separately provided with specific feedback from ASIC and APRA on their transition preparations. The feedback published now by APRA highlights the need for all institutions to plan for LIBOR transition, the aspects to consider in transition, and the importance of addressing the related issues early. To ensure a smooth transition, it is crucial that institutions in Australia are well-prepared. The country's regulators encourage all financial and corporate institutions in Australia to read the feedback, consider the implications of transition for their own situation, and plan accordingly for the end of LIBOR.  

    The feedback provides some examples of what APRA and ASIC consider to be standards of "best practice" for prudential and conduct risk mitigation measures. Respondents that are better prepared for LIBOR transition demonstrated these standards. All institutions should consider how these measures may be relevant to their LIBOR transition planning, taking into account the nature, scale, and complexity of their activities and the extent of their LIBOR exposures. The following are the some of the observed best practices:

    • Formalize a transition program that identifies risks, mitigation strategies, and timelines
    • Conduct a comprehensive assessment of how LIBOR affects an institution’s business and quantify LIBOR-related risks
    • Focus on client outreach and communication programs to ensure clients are aware of the transition risks
    • Participate in industry forums and keep abreast of market developments and coordinated actions being taken within the industry
    • Seek legal advice on contract amendment and fall-back provisions
    • Assess readiness of IT systems and infrastructure and ensure they can process contracts that reference overnight rates
    • Plan for both base and alternative scenarios, including the adoption of various alternative reference rates
    • Initiate LIBOR transition training programs for relevant stakeholders, including staff members, Boards and senior management.
    • Consider conduct-related issues associated with the transition, including the potential for conflict of interest, fair treatment of clients, and asymmetry of information. ASIC intends to release additional conduct-related information and industry guidance on LIBOR transition in 2020
    • Ensure there is adequate due diligence, risk assessment, and contingency planning in relation to third-party service providers in the context of LIBOR transition

    In line with initiatives and workstreams of international industry bodies such as IOSCO and the Official Sector Steering Group (OSSG) of FSB, the Australian regulators (APRA, ASIC, and RBA) will continue to speak and engage publicly to increase general awareness of the need to plan for LIBOR transition and to encourage institutions to start the transition early. This engagement aims to mitigate potential stability risks to the wider market by reaching a broad range of institutions to include those that have not yet been engaged on the issues. ASIC and APRA will monitor industry developments and, where appropriate, engage with relevant stakeholders to seek assurance that these outcomes are being adequately addressed.


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    Keywords: Asia Pacific, Australia, Banking, Securities, LIBOR, Alternative Reference Rates, COVID-19, Risk-Free Rates, COVID-19, Risk Free Rates, Interest Rate Benchmark, RBA, ASIC, APRA

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