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Follow the FCA on LIBOR transition

Edwin Schooling-Latter’s speech at the November conference was an important speech by the regulator of the LIBOR Benchmark. The major exposures to LIBOR transition are in US Dollars and in the United States, but it is an important reminder that the regulator of the LIBOR Benchmarks is the FCA in the UK and they will drive the next steps. Edwin Schooling-Latter, Director of Markets and Wholesale Policy spoke at a conference today. His full speech is linked here. It is important to grasp his comments and also to maintain a sense of the overall LIBOR transition scenario – especially as there are so many announcements on detailed issued released each week – and also so many varied opinions shared.

There was a clear focus on developments in the Loan Markets and on LIBOR becoming non-representative before the end of 2021. We would like to draw out certain comments:

  1. The focus on ‘pre-cessation’ triggers. Much of this commentary was to clear up documentation and pricing questions relating to a pre-cessation (i.e. before the end of 2021) announcement of LIBOR. However, we have emphasized this point before. There is a greater concern from the FCA about LIBOR going away before the end of 2021, rather than how it will be extended beyond that date. ES-L: “I repeat that warning today…..another variation of the end-game is that LIBOR’s final cessation is preceded by a period in which it still published but no longer passes the key-regulatory of being capable of measuring the underlying market or economic reality. In other words, the benchmark is no longer representative”
  2. If LIBOR becomes un-representative. ES-L clarifies that both the EU benchmark Regulation (likely immediately post their end of 2021 regulatory review) and the major Swap CCPs (possibly before end 2021 due to RFR Swaps level of activity overtaking LIBOR swaps) could be prompted to re-review LIBOR’s loss of representativeness as an interest rate benchmark. It is worth re-iterating that LIBOR, (with an average of only one transaction a day, across all the submitting banks, for the 12 months USD LIBOR) is already not truly representative, so any decision to define LIBOR as non-representative is likely to be one-time, and will never be reversed and is a continuing risk – today.

We believe points 1 and 2 are a continuing emphasis that each firm needs to set its timing parameters for the preparation for LIBOR transition, not solely or singularly as a December 31st, 2021 event. Legacy Transition will happen in stages, starting in 2020, in GBP and USD and certainly with Derivatives, likely Securities and Loans also. Forward Rates. There continues to be an extensive debate – and confusion – about forward-looking rates being established for the new RFRs, in the desire to create something more similar to existing LIBOR. There is an important difference in ES-L language on this subject here. Previously ISDA has made it clear that while forward-looking rates may be an interesting debate for other products, it wasn’t going to consider them for Derivatives as their members were happy to use SOFR as constructed – overnight rates, compounding, in arrears. 

  1. ES-L mentions that the “RFR Working Group expects overnight compounded rates to be the norm in Derivatives, Securities, and Wholesale Loans.” The addition of wholesale syndicated loans as an assumed user of overnight, compounded RFRs and not a business sector waiting for a new forward version of the RFR, is significant.
  2. One of the largest issues in Syndicated Loan markets being prepared to switch from 3- month LIBOR to SOFR or SONIA has been the ability for users to book these loans correctly. ES-L mentions the planned release by one of the largest IT platforms for Loans, (we have to assume LoanIQ) at least for GBP, on November 29th. So, the FCA will assume no excuses for not being prepared to book new RFR based trades.
  3. ES-L highlights the Sterling RFR Working Group recommendation of a target of Q3, 2020 to stop new lending using LIBOR. We are aware of at least one major bank that has already implemented this policy. We have found that passing this policy is a great way to focus the mind of preparations, on communications, functionally and with clients.

I sense that the last three points are clear siren calls for those involved in the Syndicated Loan markets to rapidly accelerate preparations for a move away from LIBOR.