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 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
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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