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FCA update – Completing sterling LIBOR transition by end-2021

FCA update – Completing sterling LIBOR transition by end-2021

Background

  • On 11 January 2021, the Financial Conduct Authority (FCA) published a further detailed update about the transition by the end of 2021 from sterling LIBOR
  • This update is important for all organisations within UK financial services as well as more widely for any UK firm that uses sterling LIBOR to price its transactions
  • After many years of preparation, 2021 is the critical year for firms to complete their transition away from LIBOR
  • The LIBOR administrator, ICE Benchmark Administration, is consulting on ceasing publication of all sterling LIBOR settings at the end of 2021, leaving just one year for firms to remove their remaining reliance on these benchmarks
  • LIBOR has been embedded in the financial system for many years to calculate interest amounts such as corporate borrowing, intra-group transfers and derivatives as well as in many accounting practices

Impacts

The Bank of England and the FCA have set out clear expectations for regulated firms to remove their reliance on LIBOR in all new business and in legacy contracts, where feasible.  The primary way for market participants to have certainty over the economic terms of their contracts is to actively transition them away from LIBOR.

In support of this, the Working Group on Sterling Risk-Free Reference Rates (the Working Group) has published an update to its priorities and roadmap for the final year of transition to help businesses to finish planning the steps they need to take now.

The Working Group’s top priority is for markets and their users to be fully prepared for the end of sterling LIBOR by the end of 2021.

In particular, the Working Group has recommended that, from the end of March 2021, sterling LIBOR is no longer used in any new lending or other cash products that mature after the end of 2021.  Throughout the remainder of 2021, existing contracts linked to sterling LIBOR should be actively transitioned where possible.

In addition, the Working Group has recommended that firms no longer initiate new linear derivatives linked to sterling LIBOR after the end of March 2021, other than for risk management of existing positions or where they mature before the end of 2021.

Senior managers with responsibility for the transition should expect close supervisory engagement on how they are ensuring their firm’s progress relative to industry milestones.

Timeline with relevant dates to be logged on regulatory calendar

  • All firms must have completed their readiness actions by 31 December 2020

Next steps

All firms and enquiries must continue detailed planning and should refer to reference sources such as relevant webpages from The Working Group, Bank of England and FCA.

If anyone has specific questions or needs any advice, contact our specialists.