FCA urges firms to prepare for LIBOR end date
25 February 2019 London
Image: Shutterstock
How firms respond to the London Inter-bank Offered Rate (LIBOR) deadline will be of fundamental importance to firms and customers, said Megan Butler, executive director of supervision, Financial Conduct Authority (FCA).
Speaking at the Investment Association, Butler cited that Inertia remains the biggest obstacle to smooth transaction to the LIBOR discontinuation by end of 2021.
Butler advised industry participants to not make the back book problem worse than it needs to be, adding that they should get it right now.
So far this year, the FCA has seen 15 sterling bond issues that have referenced compounded The Sterling Overnight Index Average-based (SONIA), with a total value of about £8.7 billion.
Butler explained that there is evidence of progress and some business are already managing down LIBOR-linked derivatives books and moving portfolios across to SONIA-based swaps, but there is work that remains to be done.
It was also noted that the FCA strongly encourages asset managers to transition their hedges and positions over to SONIA before LIBOR disappears, and before liquidity in LIBOR-derivatives begins to decline
Butler commented: “Firms can adopt different approaches to scenario planning and reviewing or re-papering contracts. There is nothing wrong with this. We’re not prescribing how you do it. But you need to do it.”
“You need to be prepared for an end date for LIBOR in 2021. Whether your exposure is to sterling LIBOR or one of the other LIBOR rates, you will hear the same message from central banks and regulators in other jurisdictions, as you hear from FCA and the Bank of England today.”
“The absence of ways to remedy the current underlying weakness in LIBOR the lack of transactions to underpin the rate, and the unattractive prospect of LIBOR limping on with fewer panel banks, all lead to one conclusion.”
Butler added: “The best option is to actively transition to alternative benchmarks. And today is an important opportunity to talk about any barriers that you face to achieving this. And to discuss the steps you need to take."
Speaking at the Investment Association, Butler cited that Inertia remains the biggest obstacle to smooth transaction to the LIBOR discontinuation by end of 2021.
Butler advised industry participants to not make the back book problem worse than it needs to be, adding that they should get it right now.
So far this year, the FCA has seen 15 sterling bond issues that have referenced compounded The Sterling Overnight Index Average-based (SONIA), with a total value of about £8.7 billion.
Butler explained that there is evidence of progress and some business are already managing down LIBOR-linked derivatives books and moving portfolios across to SONIA-based swaps, but there is work that remains to be done.
It was also noted that the FCA strongly encourages asset managers to transition their hedges and positions over to SONIA before LIBOR disappears, and before liquidity in LIBOR-derivatives begins to decline
Butler commented: “Firms can adopt different approaches to scenario planning and reviewing or re-papering contracts. There is nothing wrong with this. We’re not prescribing how you do it. But you need to do it.”
“You need to be prepared for an end date for LIBOR in 2021. Whether your exposure is to sterling LIBOR or one of the other LIBOR rates, you will hear the same message from central banks and regulators in other jurisdictions, as you hear from FCA and the Bank of England today.”
“The absence of ways to remedy the current underlying weakness in LIBOR the lack of transactions to underpin the rate, and the unattractive prospect of LIBOR limping on with fewer panel banks, all lead to one conclusion.”
Butler added: “The best option is to actively transition to alternative benchmarks. And today is an important opportunity to talk about any barriers that you face to achieving this. And to discuss the steps you need to take."
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