PRA and FCA Issue Statement on Preparations for Transition from LIBOR

By Regulatory News

June 05, 2019

PRA and FCA issued a statement that sets out key themes and good practices, along with the next steps, for the transition from LIBOR to the alternative interest rate benchmarks. Given the widespread use of, and reliance on, LIBOR, the UK authorities have published a number of observations or findings, to date, from their work on LIBOR transition. Firms may consider the observations in the context of their risk management, contingency planning, and governance frameworks. Not all findings will be relevant for all firms. These observations should, therefore, be considered with regard to the nature, scale, and complexity of a firm’s operations and its exposure to LIBOR and/or other interbank offered rates (IBORs). PRA and the FCA have indicated that firms should plan based on the likely cessation of LIBOR at the end of 2021.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

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Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

The UK authorities, in September 2018, had written a letter to CEOs of major banks and insurers supervised in the UK, asking for details of the preparations and actions they are taking to manage transition from LIBOR. The authorities have reviewed responses received from those firms that were direct recipients of the original letter and provided those firms with feedback. The statement highlights that any actions should begin with a comprehensive assessment of how LIBOR interacts with a firm’s business. PRA and FCA believe that all firms need to plan for the cessation of LIBOR and many of the observations will be relevant beyond the largest and most complex market participants that were asked to respond to the original letter. The PRA and FCA observations span across the following eight key areas:

Comprehensive identification of reliance on and use of LIBOR
Quantification of LIBOR exposures
Granularity of transition plans and their governance to ensure delivery by the end of 2021
Identification and management of prudential risks associated with the transition
Identification and management of conduct risks associated with the transition
Scenario planning based on the likely cessation of LIBOR at the end of 2021
Role of market participants in supporting transition
Transacting using new risk-free rates and building in fallbacks

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Keywords: Europe, UK, Banking, Insurance, LIBOR, Risk-Free Rates, Interest Rate Benchmark, Interest Rate Risk, Reference Rates, Benchmark Fallbacks, FCA, PRA

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