Official call to action on Libor replacement plans
20 September 2018 London
Image: Shutterstock
The UK’s Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) have written to the CEOs of the largest banks and insurers supervised in the UK asking for the preparations and actions they are taking to manage the transition from the London interbank offered rate (Libor) to alternative interest rate benchmarks.
The stated purpose of the letters is to seek assurance that the relevant senior managers and boards understand the risks associated with this transition and that they are taking appropriate action now so that firms can transition to alternative rates ahead of the end of 2021.
Firms which have not received a direct email from their supervision team linking to the letters are not within the scope of the request.
However, all firms that currently rely on Libor are encouraged to read and reflect on their contents.
The continued participation and commitment of market participants to address the various challenges during the transition will be an essential part of the success of this collective effort, the letter said.
The Bank of England and the FCA said they are grateful to firms for their engagement to date in the market-led transition effort, noting that market-led working groups in Libor currency jurisdictions have already been convened to identify potential preferred alternative risk-free rates (RFRs).
The RFRs are identified as robust overnight rates, firmly grounded in transactions, such as Sterling Overnight Index Average in the UK for sterling as its preferred RFR.
In addition to continuing to participate in market-wide initiatives, the PRA and FCA said they expect the largest banks to undertake a comprehensive risk assessment of the potential prudential and conduct impacts associated with transition in a range of different scenarios, including Libor discontinuation.
For insurers, the FCA and PRA said they recognise that Solvency II requires insurers to discount liabilities using risk-free rate curves that are in many currencies currently derived from LIBOR.
“Monitoring of Libor transition has been added as a topic to the European Insurance and Occupational Pension Authority’s (EIOPA) general work on insurance RFRs,” they added.
“Firms should understand the risks from Libor transition and any dependencies on Solvency II requirements, including in relation to EIOPA’s work.”
The letter ended with a clear call to action, requesting by Friday 14 December a board-approved summary of the assessment of key risks relating to Libor discontinuation and details of actions planned to mitigate those risks.
Assessments and plans should consider an appropriately wide range of scenarios and impacts and include a quantification of Libor exposures.
Firms are also being told to identify the senior manager(s) who will oversee the provision of the response to the letter and the implementation of its transition plan.
The letter was signed by David Rule, executive director, insurance supervision, Megan Butler, executive director of supervision, investment, wholesale and specialists division and Jonathan Davidson, executive director of supervision, retail and authorisations division.
The stated purpose of the letters is to seek assurance that the relevant senior managers and boards understand the risks associated with this transition and that they are taking appropriate action now so that firms can transition to alternative rates ahead of the end of 2021.
Firms which have not received a direct email from their supervision team linking to the letters are not within the scope of the request.
However, all firms that currently rely on Libor are encouraged to read and reflect on their contents.
The continued participation and commitment of market participants to address the various challenges during the transition will be an essential part of the success of this collective effort, the letter said.
The Bank of England and the FCA said they are grateful to firms for their engagement to date in the market-led transition effort, noting that market-led working groups in Libor currency jurisdictions have already been convened to identify potential preferred alternative risk-free rates (RFRs).
The RFRs are identified as robust overnight rates, firmly grounded in transactions, such as Sterling Overnight Index Average in the UK for sterling as its preferred RFR.
In addition to continuing to participate in market-wide initiatives, the PRA and FCA said they expect the largest banks to undertake a comprehensive risk assessment of the potential prudential and conduct impacts associated with transition in a range of different scenarios, including Libor discontinuation.
For insurers, the FCA and PRA said they recognise that Solvency II requires insurers to discount liabilities using risk-free rate curves that are in many currencies currently derived from LIBOR.
“Monitoring of Libor transition has been added as a topic to the European Insurance and Occupational Pension Authority’s (EIOPA) general work on insurance RFRs,” they added.
“Firms should understand the risks from Libor transition and any dependencies on Solvency II requirements, including in relation to EIOPA’s work.”
The letter ended with a clear call to action, requesting by Friday 14 December a board-approved summary of the assessment of key risks relating to Libor discontinuation and details of actions planned to mitigate those risks.
Assessments and plans should consider an appropriately wide range of scenarios and impacts and include a quantification of Libor exposures.
Firms are also being told to identify the senior manager(s) who will oversee the provision of the response to the letter and the implementation of its transition plan.
The letter was signed by David Rule, executive director, insurance supervision, Megan Butler, executive director of supervision, investment, wholesale and specialists division and Jonathan Davidson, executive director of supervision, retail and authorisations division.
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