COVID-19 AWARENESS: Xcina Consulting is open and operating, as usual, and here to support organisations during these challenging times. We are available to provide risk assurance and advisory services to help navigate the challenges of the new ways of working. Contact Us
Menu Close

FCA update – transition from LIBOR during 2021

FCA update: transition from LIBOR during 2021

Background

  • The interest rate benchmark LIBOR is expected to cease after 31 December 2021.
  • Firms must transition to alternative rate benchmark sources before this date.
  • LIBOR is currently produced in 7 tenors (overnight/spot next, one week, one month, two months, three months, six months and 12 months) across 5 currencies. It is based on submissions provided by a panel of 20 banks.
  • These submissions are intended to reflect the interest rate at which banks could borrow money on unsecured terms in wholesale markets.
  • Both the FCA and the Bank of England’s Financial Policy Committee (FPC) noted in 2017 that it had become increasingly apparent that the absence of active underlying markets and the scarcity of term unsecured deposit transactions raised serious questions about the future sustainability of the LIBOR benchmarks.

Impacts

The FCA has received a voluntary agreement from the LIBOR panel banks to continue to submit to LIBOR until end-2021, enabling the market to transition away from LIBOR.

All banks and other market participants need to have removed dependencies on LIBOR by this date if they are to avoid disruption when publication of LIBOR ceases.

In September 2018, the FCA sent a joint Dear CEO letter with the PRA to major banks and insurers supervised in the UK, asking for the preparations and actions they are taking to manage the transition from LIBOR to alternative interest rate benchmarks.

Based on the responses, the FCA published a feedback statement to help inform firms’ planning for the cessation of LIBOR. Also, the FCA wrote a Dear CEO Letter to all UK regulated asset management firms in February 2020 to set out its expectations.

The FCA encourages all firms who rely on LIBOR to read, reflect and act on these letters. The discontinuation of LIBOR will affect firms if they have not prepared for this event.

The FCA expects firms to take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or harm to consumers, and to support industry initiatives to ensure a smooth transition.

International co-ordination on replacement benchmarks continues vigorously.  Alternatives already include: Secured Overnight Financing Rate (SOFR) (USA); Sterling Overnight Index Average (SONIA) (UK); Swiss Average Rate Overnight (SARON) (Switzerland); and Tokyo Overnight Average Rate (TONAR) (Japan).

Timeline with relevant dates to be logged on regulatory calendar

  • Transition from LIBOR will be completed by 31 December 2021.

Next steps

Firms should speak to their normal supervisory contacts at the FCA to get more information on any related topics.

Click here if you would like to get in touch with us.