“Global regulators are now urging all market participants to focus their attention on their preparedness for the transition away from LIBOR.”

By December 31st, 2021, the London Interbank Offered Rate (LIBOR) is due to be phased out and no longer published by LIBOR panel banks. Global regulators are now urging all market participants to focus their attention on their preparedness for the transition away from LIBOR.1

LIBOR is used to price and benchmark contracts worth around $400 trillion globally, ranging from home loans to credit cards, swaps and securitizations, and are used by corporations and banks to hedge themselves against unexpected moves in interest rates.2 The Financial Stability Board (FSB), an international regulatory body based in Switzerland, stated in December 2019 that it plans to survey national regulators to measure the progress in persuading financial services firms to move away from LIBOR to new Risk-Free Rates (RFRs).3 They have been joined by global regulators calls to action and pronouncements of the importance of firms’ transition preparation. This includes the Hong Kong Monetary Authority and the Bank of Japan in Asia, The Bank of England (BoE) and Financial Conduct Authority (FCA) in the UK, and among others the New York Department of Financial Services (NYDFS) and the Office of Comptroller of the Currency (OCC) in the U.S.4

What this means

In the UK and the U.S. multiple regulators are emphasizing their focus on the LIBOR transition, and financial firms readiness to move to RFRs. They are increasingly publishing milestones, and concrete steps that should be taken to mitigate any risks associated with the LIBOR transition. The FSB, which coordinates financial rules for the Group of 20 Economies (G20), has stated that “Firms need to end the use of LIBOR in new contracts as soon as possible.”5 It plans to report to the G20 in July 2020 on the challenges to the LIBOR transition.6

UK7

  • On January 16th, 2020, the BoE and the FCA, in conjunction with the Working Group on Sterling Risk-Free Reference Rates (RFRWG) outlined priorities and milestones for the LIBOR transition.
  • The RFRWG published priorities and a roadmap for 2020, which includes, ceasing issuance of cash products lined to Sterling LIBOR by end of Q3 2020, permitting a shift of volumes from LIBOR to SONIA in the derivatives markets and encouraging a switch in the convention for Sterling interest rate swaps as of March 2nd, 2020. As well, the working group is establishing a framework for the transition of legacy LIBOR products to significantly reduce LIBOR referenced contracts by Q1 2021.
  • The BoE and FCA published a statement encouraging market makers to change the convention for Sterling interest rate swaps from LIBOR to the Sterling Overnight Interbank Average (SONIA) rate by March 2nd, 2020.
  • The UK authorities specifically highlighted the risks in entering into new LIBOR contracts, particularly any that would mature after the end of 2021, and that financial firms should make clients aware of these risks. The joint BoE and FCA letter is unambiguous as they state “The intention is that Sterling LIBOR ceases to exist after the end of 2021. No firm should plan otherwise.”8
  • On January 20th, 2020, the FCA issued a CEO Letter to Asset Managers making clear that firms should plan their LIBOR transition, recognizing their responsibilities to customers and the market, to facilitate and contribute to an effective transition to more appropriate rates such as SONIA.9 The agency announced that they plan on gathering data from asset management and alternative investment firms to understand their business models, and their exposure to LIBOR risk. They also confirmed their intent to continue to communicate their specific expectations for LIBOR transition over the next few months.10

U.S.11

  • On December 23rd, 2019, the NYDFS requested that all regulated institutions submit responses by February 7th, 2020, detailing their LIBOR transition plans. This included programs that would identify and monitor all the financial risks of transition, processes for analyzing alternative rates, plans for communications with clients and counterparties, operational readiness for the transition, and a governance framework which should include oversight by the board of directors and senior management. On January 23rd, in response to numerous requests from NYDFS regulated entities, the Department issued an extension to the response deadline to March 23rd, 2020. They expressly stated that this was the “final deadline.”
  • On December 9th, 2019, the OCC issued its Semiannual Risk Perspective for Fall 2019, highlighting that they would be increasing their regulatory oversight of LIBOR preparedness. Throughout 2020, the OCC examiners plan to evaluate banks on their assessment of their LIBOR exposure and potential impacts, as well as risk management strategies. The OCC identified risks for financial institutions to assess, including repapering contracts, appropriate contractual fallback language, client impact and communication, updating system applications, and revising and testing technology and models.
  • On December 30th, 2019, the Securities and Exchange Commission (SEC) issued a statement assessing the role of Audit Committees and the part they play in the LIBOR transition. They encouraged them “to understand management’s plan to identify and address he risks associated with reference rate reform, and specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR.”12 This statement follows the SEC’s July 2019 statement outlining the areas of risks associated with the LIBOR transition.
  • On January 9th, 2020, the Financial Industry Regulatory Authority (FINRA) issued its Risk Monitoring and Examination Priorities Letter, which included a focus on its engagement with financial firms to understand how they are preparing for LIBOR’s cessation. They plan to specifically assess LIBOR related exposure, transition plans, and the impact on clients and counterparties.
  • On October 17th, 2019, the Consumer Financial Protection Bureau (CFPB) posted guidance emphasizing that the discontinuation of LIBOR could affect various consumer financial products, including adjustable rate mortgages, home equity lines of credit, credit cards, student loans, auto loans, and any other personal loans that use LIBOR as a benchmark. The conversion of consumer contracts, and communication with those consumers could involve the CFPB, when pertaining to consumer protection laws and regulations.
  • On February 5th, 2020, the Federal Housing Finance Agency (FHFA) announced steps that Fannie Mae and Freddie Mac are taking as they transition away from LIBOR. New language will be required for Adjustable Rate Mortgage (ARM) instruments closed on or after June 1st, 2020, and acquisitions of LIBOR benchmarked Uniform Adjustable Rate Mortgages (ARMs) will cease on or before December 31st, 2020.13 The FHFA had previously instructed both agencies and FHL banks to stop purchasing new LIBOR benchmarked investments with maturities that extend beyond December 2021.14

Conclusion

Regulators globally are clearly focused on the LIBOR transition, and are being unambiguous in warning financial market participants to understand the functionality of alternative reference rates, and comprehensively assess LIBOR exposure as they develop a transition plan, and implement sufficient corporate governance to permit sufficient oversite of the transition process. The UK regulators have started to impose deadlines in the coming months, and it is likely the Alternative Reference Rate Committee (ARRC), among others in the U.S. will do the same. Richard Fox, Head of Markets Policy at the FCA told a conference organized by the International Swaps and Derivatives Association (ISDA) on January 30th, 2020, “I would expect the ARRC to come out with some date-specific targets that should really focus minds,”15 concluding “This year you will really start to see the needle move.”16 Fox met with representatives of the ARRC confirming that they were keen to copy the UK approach of using a string of deadlines leading to 2021.17 It is becoming clear that financial institutions who ignore these statements may risk regulatory enforcement proceedings, and suggests that regulators globally may not wait until after the 2021 deadline to hold their regulated entities accountable.

References:

  1. “Global regulator ratchets up pressure on banks and markets to ditch Libor,” Reuters, December 18, 2019. Access at: https://www.reuters.com/article/us-libor-markets-regulator/global-regulator-ratchets-up-pressure-on-banks-and-markets-to-ditch-libor-idUSKBN1YM1WJ. 
  2. Ibid 
  3. Ibid 
  4. Global Regulators Press Market Participants to Prepare Now for LIBOR Transition,” Paul Weiss, January 22, 2020. Access at: https://www.paulweiss.com/practices/litigation/financial-institutions/publications/global-regulators-press-market-participants-to-prepare-now-for-libor-transition?id=30518. “Factbox: The global benchmarks replacing Libor, Reuters, October 8, 2019. Access at: https://www.reuters.com/article/us-britain-libor-transition-factbox/factbox-the-global-benchmarks-replacing-libor-idUSKBN1WN0HN. 
  5. “Global regulator ratchets up pressure on banks and markets to ditch Libor,” Reuters, December 18, 2019. Access at: https://www.reuters.com/article/us-libor-markets-regulator/global-regulator-ratchets-up-pressure-on-banks-and-markets-to-ditch-libor-idUSKBN1YM1WJ 
  6. Ibid 
  7. “Global Regulators Press Market Participants to Prepare Now for LIBOR Transition,” Paul Weiss, January 22, 2020. Access at: https://www.paulweiss.com/practices/litigation/financial-institutions/publications/global-regulators-press-market-participants-to-prepare-now-for-libor-transition?id=30518. 
  8. Ibid  
  9. Financial Conduct Authority CEO Letter to Asset Managers on LIBOR Transition, January 20, 2020. Access at: https://www.fca.org.uk/publication/correspondence/asset-management-portfolio-letter.pdf 
  10. Ibid 
  11. “Global Regulators Press Market Participants to Prepare Now for LIBOR Transition,” Paul Weiss, January 22, 2020. Access at: https://www.paulweiss.com/practices/litigation/financial-institutions/publications/global-regulators-press-market-participants-to-prepare-now-for-libor-transition?id=30518. 
  12. Ibid
  13. “FHFA Announces Fannie Mae and Freddie Mac Update on LIBOR Transition,” Federal Housing Finance Agency, February 5, 2020. Access at: https://www.fhfa.gov/mobile/Pages/public-affairs-detail.aspx?PageName=FHFA-Announces-Fannie-Mae-and-Freddie-Mac-Update-on-LIBOR-Transition.aspx 
  14. “LIBOR Transition,” Federal Housing Finance Agency. Access at: https://www.fhfa.gov/SupervisionRegulation/LIBORTransition. 
  15. “U.S. set to copy Britain with milestones for scrapping Libor, UK watchdog says,” Reuters, January 30, 2020. Access at:  https://mobile-reuters-com.cdn.ampproject.org/c/s/mobile.reuters.com/article/amp/idUSL8N29Z4H1. 
  16. Ibid 
  17. Ibid 

Newsletter Author: Venetia WooMairi Bryan

Newsletter Contact Person: Venetia Woo 

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