FSB Sets Out Roadmap for Transition to Alternative Reference Rates
FSB published a global transition roadmap for London Inter-bank Offered Rate (LIBOR). The roadmap sets out a timetable of actions for financial and non-financial sector firms to take to ensure a smooth LIBOR transition by the end of 2021. This roadmap is intended to inform those with exposure to LIBOR benchmarks of some of the steps they should be taking now and over the remaining period to the end of 2021 to successfully mitigate these risks. These prudent steps are intended to supplement the existing timelines or milestones from industry working groups and regulators.
The LIBOR benchmarks are not guaranteed to continue to be available after the end of 2021 and, therefore, preparations should be underway to reduce reliance on these rates well ahead of that point. Use of LIBOR in the five LIBOR currencies (USD, GBP, EUR, JPY, and CHF) is widespread internationally. As such, transition away from LIBOR by the end of 2021 requires significant commitment and sustained effort from both financial and non-financial institutions across many LIBOR and non-LIBOR jurisdictions. The roadmap sets out clear actions, including the following, needed from financial firms and their clients to ensure a smooth LIBOR transition:
- Firms should have already identified and assessed all existing LIBOR exposures and agreed on a project plan to transition in advance of the end of 2021. The firms that currently provide clients with products that reference LIBOR should have begun to implement a plan for communicating with end-users of LIBOR referencing products maturing beyond the end of 2021 to ensure that they are aware of the transition and the steps being taken to support moving those products to alternative reference rates.
- By the effective date of the ISDA Fallbacks Protocol, FSB strongly encourages firms to have adhered to the Protocol subject to individual firms’ usual governance procedures and negotiations with counterparties, as necessary. Where the protocol is not used, other appropriate arrangements will need to be considered to mitigate risks. Providers of cleared and exchange-traded products linked to LIBOR should also ensure that these products incorporate equivalent fallback provisions as appropriate.
- By the end of 2020, firms should be in a position to offer non-LIBOR-linked loans to their customers. This could be done either in terms of giving borrowers a choice in terms of the reference rate underlying their loans, or by working with borrowers to include language for conversion by the end of 2021 for any new, or refinanced, LIBOR-referencing loans.
- By mid-2021, firms should have established formalized plans to amend legacy contracts and should have implemented the necessary system and process changes to enable transition to robust alternative reference rates.
- By the end of 2021, firms should be prepared for LIBOR to cease. All new business should either be conducted in alternative reference rates or be capable of switching at limited notice. For any legacy contracts for which it has not been possible to make these amendments, the implications of cessation or lack of representativeness should have been considered and discussed between the parties and steps taken to prepare for this outcome, as needed. All business critical systems and processes should either be conducted without reliance on LIBOR or be capable of being changed to run on this basis at limited notice.
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Keywords: International, Banking, Securities, LIBOR, Fallback Protocol, Legacy Contracts, Roadmap, Benchmark Reforms, FSB
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