UNITED KINGDOM: FCA Tell Asset Management Firms to Prepare for the End of LIBOR

Friday February 28 2020

The Financial Conduct Authority (FCA), has written to asset management firms in the UK setting out their expectations for firms as they prepare for the end of LIBOR. LIBOR will cease to exist after end 2021. The FCA expect 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.

The FCA have highlighted that is it essential that firms reflect on the points raised I the letter and act as appropriate. LIBOR ending is a market event and the transition to alternatives is market-led. The FCA expect firms to take proactive steps now where appropriate and not to wait for instructions from clients. Firms should not expect or base their transition plans on future regulatory relief or guidance or on legislative solutions.

On 16 January 2020 the FCA, the Bank of England and the Working Group on Sterling Risk-Free Reference Rates published documents containing targets for 2020 on LIBOR transition. These documents make it clear that ‘firms need to accelerate efforts to ensure they are prepared for LIBOR cessation by end-2021’ and that, ‘2020 will be a key year for transition’.

The following targets are intended to support the smooth transition of the industry to alternative rates ahead of end 2021.

• ‘The FCA and the Bank of England encourage market makers to change the market convention for sterling interest rate swaps from LIBOR to SONIA … (and) … have identified 2 March 2020 as an appropriate date for this change to happen.’

Asset management firms are users of swaps on behalf of clients, and so this target implies asset management firms should now consider switching from LIBOR swaps to SONIA swaps for new positions where possible.

• One of the RFR Working Group’s priorities is to ‘Cease issuance of GBP LIBOR-based cash products maturing beyond 2021 by end Q3 2020.’

Asset management firms are significant investors on behalf of clients in cash products (such as bonds, securitisations, structured products, loans). Therefore, this target suggests asset management firms should consider not making any new investments in GBP LIBOR based cash products maturing beyond 2021 by end Q3 2020.

Asset management firms also often operate funds and other products which have benchmarks or performance fees linked to LIBOR. The FCA think this target of end Q3 2020 is sensible for firms to consider when planning to cease launching new products with benchmarks or performance fees linked to LIBOR.

• Another of the RFR Working Group’s priorities is to ‘Establish a clear framework to manage transition of legacy LIBOR products, to significantly reduce the stock of GBP LIBOR referencing contracts by Q1 2021.’

This target is directly applicable to asset management firms that have LIBOR exposures or dependencies in the funds they operate, or the instruments they hold on behalf of clients. Firms having LIBOR exposures or dependencies, but do not have a plan in place, must act now.

Products and Services

All asset management firms should assume LIBOR will cease after December 2021. If they offer products or services that are exposed to or dependent on LIBOR, they should consider very carefully whether their products and services will meet the needs of clients and perform in the manner expected after 2021. Where firms issue new products with LIBOR exposure beyond 2021, they may need to pay attention to whether such products comply with product governance rules. Example considerations might include whether the use of LIBOR affects whether the charging structure is appropriately transparent or too complex to understand.

Replacing LIBOR with alternative rates in existing and new products

Firms which operate funds, collective investment schemes and/or segregated mandates, with objectives and other features that reference LIBOR, such as benchmarks or performance fees. If this is the case, managing transition might involve developing and offering new products that reference alternative rates and amending the constitutional documents of existing products either to include fall-back provisions or to replace LIBOR with alternative rates. Firms should consider which obligations may be triggered when making changes to product documents, such as requirements to notify the FCA or clients, before the changes are effected.

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