FCA tells asset managers to stop using products linked to LIBOR

In its letter to asset management CEOs (4 page / 514KB PDF), the FCA said firms need to take “proactive steps now where appropriate and not wait for instructions from clients” in order to end the use of the LIBOR calculation of interest rates by the end of 2021.

The warnings follow the publication of targets for the transition away from LIBOR by the Working Group on Sterling Risk-Free Reference Rates (RFRWG) in January this year.

The FCA said asset management firms should consider switching from swaps linked to LIBOR to the alternative SONIA index for new positions. They should consider not making any new investments in LIBOR cash products maturing beyond 2021 by the end of the third quarter of 2020.

The regulator said asset managers should consider the same deadline of the third quarter of this year when planning when to stop launching new products with benchmarks or performance fees linked to LIBOR.

It also warned that firms with LIBOR exposures or dependencies needed to put a plan in place to deal with these now, and not delay further. The firm’s board needed to oversee the transition plan, and all operational processes had to be prepared for the transition to alternative rates, said the letter.

Firms were also reminded that if they were moving to new products referencing alternative rates, or changing the documents of existing products, they had to consider any obligations that could be triggered – including the need to notify the FCA or clients – before the changes took place.

“It is essential that you reflect on the points raised in this letter and act as appropriate. LIBOR ending is a market event and the transition to alternatives is market-led. We expect you 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,” the FCA said.

The letter to asset managers follows a series of earlier warnings, including the publication of guidance on the transition away from LIBOR aimed at all financial services firms in November last year.

LIBOR is a measure of the average rate at which banks are willing to borrow wholesale, unsecured funds, and is used to price or value a wide range of financial products. The rate has become less reliable as the number of transactions underpinning the rate has fallen, while previous attempts at market manipulation and false reporting have also decreased confidence in the rate.

The Bank of England has previously identified the SONIA (Sterling Overnight Index Average) rate as its preferred alternative to LIBOR, but experts have called for more guidance on its use.

Financial regulation expert Andrew Barber of Pinsent Masons, the law firm behind Out-Law, said: "Asset managers now need to focus on issues arising from the transition from LIBOR following the FCA's 'Dear CEO' letter".

"While the letter helps asset managers to identify areas within their business that they will need to look at, the underlying messages remain consistent with those that the FCA has been providing to the wider financial services markets," he said.

"Senior managers should also take note of the comments around governance and planning. The FCA appears to be laying the groundwork now for potential action against any senior manager that has responsibilities for LIBOR transition but doesn't adequately carry them out. Senior managers have been warned," he said.