FCA urges asset management firms to prepare for end of LIBOR

The UK Financial Conduct Authority (FCA) has earlier today sent a “Dear CEO” letter to asset management firms advising them to prepare now for the end of LIBOR.

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 March 2, 2020 as an appropriate date for this change to happen. As asset management firms are users of swaps on behalf of clients, this target implies asset management firms should now consider switching from LIBOR swaps to SONIA swaps for new positions where possible, the FCA explains.

Further, 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 the end of the third quarter of 2020.

Asset management firms also often operate funds and other products which have benchmarks or performance fees linked to LIBOR. Hence, the FCA thinks 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.

The FCA advises asset management firms to prepare a transition plan. The plan should:

• carefully quantify all investments, operations and activities with LIBOR exposures and dependencies for a firm and its clients;
• consider both how the firm will remove or ameliorate existing exposures and dependencies in a timely manner and avoid creating new ones, and
• include a strategy for keeping clients appropriately informed of such changes as they are developed and implemented.