Out-Law / Your Daily Need-To-Know
Financial institutions should keep their plans for transitioning away from LIBOR up-to-date so they can act on announcements made by the Financial Conduct Authority (FCA) that will alter existing contracts, an expert has said.
The FCA has promised to communicate with industry when LIBOR settings "are no longer going to be representative of the underlying market the rates seek to measure".
The regulator said that it does not believe LIBOR to cease or become unrepresentative before the end of 2021, which is the point at which its existing agreement with LIBOR panel banks to continue referencing the rate will expire. However, it confirmed that it could make pre-emptive announcements about the future cessation or unrepresentativeness of LIBOR prior to that deadline.
The FCA has acknowledged that some contracts are drafted in such a way that any such announcement would immediately trigger changes in those contracts. In those situations, references to LIBOR would be converted to other rates.
"Markets need to be prepared … for potential announcements that some or all LIBOR settings will cease after end-2021, or we find that they are no longer going to be representative, after end-2021," the FCA said. "These announcements may be necessary because we are given notice of the departure of panel banks."
"Announcements could be made before end-2021, even if the cessation or loss of representative status would not occur until the panel banks had left at the end-2021 or another applicable date of panel bank departure thereafter," it said.
Financial services regulation expert Lauren McCarthy of Pinsent Masons, the law firm behind Out-Law, said financial firms should take note of the FCA’s statement on how it will announce LIBOR contractual triggers.
"Firms should make sure they are subscribed to and regularly monitor news outlets, including the regulatory news service," McCarthy said. "Firms will need to be prepared to implement their transition plans as soon as possible where those plans are linked to these sorts of announcements."
"The FCA’s statement also gives some more clarity around what type of announcement might be made towards the end of 2021, although it remains unclear whether and when LIBOR will cease or be considered unrepresentative. Firms should continue to review their contracts and update their transition plan in light of the FCA’s statement as necessary," she said.
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 FCA said late last month that asset management firms stop selling products and using fee structures linked to LIBOR. The regulator wants to end the use of the LIBOR calculation of interest rates by the end of 2021 and has urged firms to consider switching from swaps linked to LIBOR to the alternative Sterling Overnight Index Average (SONIA) index for new positions. It said firms should consider not making any new investments in LIBOR cash products maturing beyond 2021 by the end of the third quarter of 2020.
The Bank of England previously identified the SONIA rate as its preferred alternative to LIBOR, but experts have called for more guidance on its use.
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