February 21, 2019

Megan Butler of FCA, during an event at the Investment Association in London, spoke about the progress made on transition to overnight risk-free rates and what remains to be done. She highlighted billions of dollars of financial contracts still need to move on to a new benchmark rate. Firms must end their reliance on London Inter-bank Offered Rate (LIBOR) and they need to plan for LIBOR to discontinue at the end of 2021.

Although progress has been observed, there is still work that needs to be done. Ms. Butler explained the importance of making this transition timely and smooth, while highlighting the need for future planning, as there still exists nearly GBP 60 billion in bond issuance that references sterling LIBOR and matures post-2021. She also outlined the results of feedback received from firms by FCA and PRA. The responses show that firms among UK banks and insurers are in different states of readiness for LIBOR transition. The majority of firms have provided good evidence about the work they are doing to prepare for transition. However, in some cases the FCA letter has been a catalyst for action. Some firms held their first transition leadership meetings after receiving the letter while some were unable to provide a lot of detail about the action they have taken to protect the continuity of contracts. Yet others were not yet able to describe their progress on adoption of the new risk-free rates; their presence in the SONIA swap and future markets; and the governance they are creating for new products. 

FCA strongly encourages asset managers to transition their hedges and positions over to SONIA before LIBOR disappears and before liquidity in LIBOR-derivatives begins to decline. Firms can adopt different approaches to scenario planning and reviewing or re-papering contracts. FCA is not prescribing how firms should do it. She reiterated, "Whether your exposure is to sterling LIBOR or one of the other LIBOR rates, you will hear the same message from central banks and regulators in other jurisdictions, as you hear from FCA and the Bank of England." In conclusion, she emphasized, "If this transition is chaotic, it could have serious repercussions. It is therefore an imperative that we take preparations for 2021 seriously."

 

Related Link: Speech

  

Keywords: Europe, UK, Banking, Insurance, Securities, Interest Rate Benchmarks, SONIA, LIBOR, PRA, FCA

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