LIBOR: FCA and BoE call time on LIBOR

On 5 June, the Bank of England, the FCA and the Working Group on Sterling Risk Free Reference Rates (Sterling RFR WG) jointly held a conference on the transition from LIBOR to alternative risk-free rates and both the FCA and PRA published feedback on the Dear CEO letter on LIBOR transition.

Read our full summary here.

A summary of our key takeaways can be found in the accordions below

LIBOR Transition Conference

  1. Supervisory engagement will intensify
    The Bank of England said it could see the “level of supervisory engagement on this topic intensifying” to make sure firms are ready for end 2021. Expect further dialogue with regulators.
  2. Senior focus is necessary
    Senior individuals need to be involved. The Sterling RFR WG has launched a new sub-group for senior leaders. The Sterling Senior Advisory Group will set the strategic direction and deploy resource and influence within their own institutions to maintain momentum.
  3. Do not wait!
    - Pace of progress needs to accelerate – although progress has been made, particularly in the bond and derivative markets, transition to RFRs needs to accelerate.
    - Do not wait for others – firms should not leave it to the last moment, relying on the efforts of others, but should invest in making the required changes now.
    - Do not wait for term rates – market participants should not wait for term RFRs to be developed as using the overnight RFR directly is more robust.
  4. Roadmap
    The Sterling RFR WG has published a roadmap. This envisions key milestones being met during 2020 (eg completion of infrastructure build and updates to models/systems in Q2 and the end of GBP LIBOR linked issuances which mature post 2021 in Q3).
  5. The Sterling RFR WG's three focus points
    The Sterling RFR WG will focus on (a) the development of a term SONIA rate, (b) accounting treatment and (c) regulatory roadblocks.
  6. Hedge accounting relief
    The Sterling RFR WG expects the IASB to implement relief from next January.
  7. Regulatory road blocks
    The Sterling RFR WG will write to relevant regulators highlighting regulatory issues and requesting their removal (eg in relation to EU mandated discount curves, domestic capital model approvals and margin requirements).
  8. Nothing is off the table
    Andrew Bailey said that “nothing is off the table” in respect of the “tough” legacy book. What does this mean?
  9. Communicate with the public sector
    Engage actively with the public sector now by coming forward with any issues/roadblocks “in the spirit of solving problems”.

Feedback on Dear CEO letter responses

  1. This is for everyone
    All firms need to focus on the feedback, although it may be that not every point is relevant for every firm. The feedback highlights the approach taken in the stronger responses. That’s the new bar.
  2. LIBOR is pervasive
    It’s not just found in firms’ balance sheet positions but in valuation, pricing, performance evaluation and risk management. System dependencies on LIBOR need to be identified.
  3. A multi-dimensional exposure assessment is needed
    By product, currency, tenor, counterparty, size and entity
  4. Clear governance is vital
    Reporting lines, target setting, escalation processes, identification of key market information and regular updates.
  5. This is going to take time and money
    Thought needs to be given to the type, extent and cost of support.
  6. Don't make the problem bigger
    Proactively focus on new RFR products and, if that’s not possible, ensure that you have robust fallbacks in all products.
  7. Think about conduct risk
    Focus on internal and external comms and education, manage conflicts of interest and focus on managing internal market manipulation risk.
  8. Don't wait!
    Focus now on transitioning or preparing for transition. Don’t wait for term rates or any other magic solution and don’t leave transition until 2021.
  9. Get involved
    To move across to the RFRs, firms need to actively engage with public/private sector and trade association working groups as well as respond fully to market consultations.