The interest rate benchmark LIBOR is expected to end after 2021. The FCA has recently updated its web-pages highlighting the governance and conduct risks its sees for the transition to alternative rates. The message to asset managers, summarised below, is evaluate fully your exposure to LIBOR and establish governance arrangements to manage the impact for clients and the firm.
Governance and accountability
Firms’ senior managers and boards are expected to understand the risks associated with LIBOR transition and take appropriate action to move to alternative rates ahead of end-2021. Insufficient preparation, the FCA thinks, could impact on the safety and soundness of firms and cause harm to clients and the market.
Asset managers may have exposure to LIBOR in a number of areas, including the use of LIBOR-referencing interest rate derivatives to hedge interest rate risk and investments in bonds or other securities in which interest payments reference LIBOR.
So, where appropriate, the FCA is telling firms that are subject to the Senior Managers and Certification regime (SM&CR) and are impacted by LIBOR transition to:
Asset managers will need to take steps to identify their and their clients’ exposures to LIBOR, manage the transition impact ahead of end-2021, the risks associated with critical outsourced functions and identify conflicts of interest. Firms should have a plan in place for their investment strategy and best execution that considers the costs and implications of transition to deliver in the best interests of customers.
Firms may manufacture products or use contracts linked to or that reference LIBOR that could mature after end-2021. Or firms may use LIBOR as a distribution or risk-management benchmark. LIBOR discontinuation should lead to inferior terms arrangements for clients and the FCA will pay close attention to how firms treat customers fairly.
The best way the FCA says to avoid the complications of calculating and explaining fall backs from LIBOR to replacement rates is to avoid new LIBOR contracts that mature after end-2021.
Ellis Wilson can help with your project planning and preparation for LIBOR transition. Working with Compliance and the business lines, we can help prepare an impact assessment and transition management plan, providing advice, assistance and assurance that your firm can live without LIBOR.