UK regulators want information from financial firms over preparations for transitioning away from LIBOR

Maria Nikolova

Banks, insurers, building societies and designated investment firms will have to report back to the PRA and the FCA by December 14th.

London

Transitioning away from LIBOR has been high on the agenda of UK regulators for a while. Earlier this summer, the Working Group on Sterling Risk-Free Reference Rates highlighted the challenges in the shift from LIBOR to alternatives like SONIA.

Today, the matter was raised again in a “Dear CEO” letter by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) who are writing to the CEOs of large banks and insurance companies regarding the ongoing global benchmark reform effort.

The campaign, mandated by the Financial Stability Board (FSB), is driven in the UK by the Financial Policy Committee (FPC), the Bank of England (Bank), and the FCA. The purpose of today’s letter is to seek assurance that firms’ senior managers and boards understand the risks associated with this transition and are taking appropriate action now so that your firm can transition to alternative rates ahead of end-2021.

The FCA and contributor banks have worked to secure voluntary panel bank support to sustain LIBOR until the end of 2021. But, as Andrew Bailey mentioned in his July 2018 speech, firms should treat a LIBOR discontinuation event ‘as something that will happen and which they must be prepared for’.

The regulators note that the firms’ continued participation and commitment to develop new market structures, new technologies, and standards and solutions to address the various challenges during this transition will be an essential part of the success of this collective effort.

In addition to continuing to participate in market-wide initiatives, the PRA and FCA expect the largest banks to undertake a comprehensive risk assessment of the potential prudential and conduct impacts associated with transition in a range of different scenarios, including LIBOR discontinuation. This assessment should be proportionate to the extent of firms’ usage of LIBOR and LIBOR-referencing instruments.

In response to this letter, the regulators request that the firms provide by December 14, 2018:

  • a board-approved summary of a firm’ assessment of key risks relating to LIBOR discontinuation and details of actions you plan to take to mitigate those risks. Assessments and plans should consider an appropriately wide range of scenarios and impacts and include a quantification of LIBOR exposures; and
  • identification of Senior Manager(s) within a firm who will oversee the provision of the response to this letter and the implementation of its transition plans.

The regulators say they will review these responses and consider appropriate next steps, and they will also supplement the FPC’s monitoring of the risks associated with LIBOR discontinuation and transition.

Let’s recall that in March this year, the FCA published its Policy Statement in relation to LIBOR contributions. The FCA said back then it would consider the time and costs associated for a new bank becoming a LIBOR contributor. Around half of the respondents offered estimates of the time it would take for a new contributor to be able to provide input data. These ranged from 10-12 weeks, if contributing transactions only, to 21 months. Most responses were in the range 6 to 12 months.

The FCA had also asked about the costs of becoming a contributor. The FCA CBA had estimated a one-off cost of around £3.5 million, and an annual cost of around £2.4 million. Respondents generally agreed that these were reasonable estimates or offered their own estimates that were not very different.

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