Australian companies continue to write LIBOR-linked contracts, ASIC reports

Maria Nikolova

While some respondents to ASIC’s “Dear CEO” letter demonstrated that significant planning was under way for LIBOR transition, in other cases this work has yet to commence.

The Australian Securities and Investments Commission (ASIC) today published the feedback on responses to the ‘Dear CEO’ letter from selected major Australian financial institutions, detailing their preparation for the end of London Interbank Offered Rate (LIBOR).

The feedback highlights the need for all institutions to plan for LIBOR transition, the aspects to consider in transition and the importance of addressing the related issues early. To ensure a smooth transition, it is crucial that institutions in Australia are well-prepared, the regulator says.

In May 2019, ASI) wrote to the CEOs of selected major Australian financial institutions, requesting information to better understand how these institutions are preparing for the end of LIBOR.

Institutions have responded to the letter, with their responses confirming that the overall impact of LIBOR in Australia is substantial.

The aggregate notional LIBOR exposure of respondents is approximately A$10 trillion, with 40% of that expected to mature after the end of 2021(when the continuation of LIBOR will no longer be supported by the UK Financial Conduct Authority). Responses also indicated that due to liquidity concerns in alternative reference rates (ARRs), entities are continuing to write LIBOR-linked contracts.

Details of the responses reflected various levels of preparedness between different segments of the industry. While some respondents demonstrated that significant planning was under way for LIBOR transition, in other cases this work was yet to commence in earnest. Given that LIBOR will not be supported beyond 2021, and the scale of work involved in transitioning to alternative benchmarks, prompt action is imperative.

ASIC warns that if, by the end of 2021, institutions have not transitioned to alternative reference rates or put robust fall-back provisions in place for legacy contracts, significant reputational, operational and legal risks to financial institutions could be realised, risking disruptions in financial markets.

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