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Do you have the right end date for LIBOR transition?

LIBOR will cease to exist as a ‘Benchmark’ at the end of 2021. The Benchmark’s regulator, the FCA, has been very clear and consistent in this message.

The process to replace IBORs with Risk-Free Reference Rates (RFRs) is a post-financial crisis plan. It was started by the G20 in 2013, has been driven since by the Financial Stability Board, the FCA, then the Federal Reserve Board (FRB) and ARRC – which was convened in November 2014 – and since by all 16 IBOR regulators, and US regulators including FRB, Federal Reserve Bank of New York, OCC, CFTC, SEC and FDIC amongst others. This is not new news. The regulators have been consistent and clear on the broader LIBOR cessation issues.

10 predictions for end of 2021 LIBOR transition outcomes

This is our top 10 list of what we expect to be happening at the end of 2021 when LIBOR disappears.

Agitated Regulators and Supervisors. LIBOR transition will be a top-of-mind regulatory issue. “WHERE ARE YOU ON YOUR LIBOR TRANSITION PREPARATION!”

No institution will be fully and properly prepared for the transition away from LIBOR – firms will have been forced to make risk-based decisions to proceed anyway.

LIBOR Transition Implementation Checklist

The LIBOR transition is a significant event impacting a broad set of financial products and market segments. Given how deeply embedded LIBOR is in the financial ecosystem, it is important to properly plan, mobilize, and execute a program that encompasses all of a firm’s businesses and functions. This checklist was developed to provide considerations for impacted firms.

Simplified practical implementation checklist for SOFR adoption:

Establish Program Governance: Implement a robust governance framework with accountable senior executives to oversee the delivery and coordination of the firm’s enterprise-wide LIBOR transition program.

The FX Code of Conduct – a new priority

The expectation is that beginning in 2020, there will be a US regulatory focus (driven by the Federal Reserve Bank and the UK’s Financial Conduct Authority) on Banks and Financial Services firms evidencing proper implementation and proof of compliance with the FX Global Code of Conduct. This will be a priority item of the FRB’s 2020 supervisory process.

Although the FX Global Code does not impose legal or regulatory obligations on Market Participants, the focus by US Regulators on FX market issues remains high as they continue to deal with legacy and new behavioral issues in the FX Market.

Alternative Reference Rate Committee (ARRC) Recommended Fallback Provisions

Most contracts that reference LIBOR include a ‘fallback’ clause, which defines the rate that the contract would fall back to if LIBOR were no longer available – a condition that, it had always been assumed, would be a temporary one if it were to occur at all. Historically there was a wide spectrum of rates used to temporarily replace LIBOR in financial contracts, that included: ‘the last LIBOR rate,’ ‘the closest equivalent rate’, ‘the prime rate’, ‘calling a bank and requesting their rate bilaterally,’ and no fallback at all. In our brave new world of LIBOR’s eventual demise, the ARRC was formed to, in their own words, ‘support and prepare market participants for the transition from U.S. dollar (USD) LIBOR to the Secured Overnight Financing Rate (SOFR).’

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.

LIBOR Transition Cascade Reality

We recognize from large bank client feedback, that no one will be fully prepared for a LIBOR transition of all products, all jurisdictions, all functions, all clients by end of 2021.

Decisions for LIBOR transition, unlike those for other scale transition programs like Dodd Frank, Volcker, MiFID, CCAR, Basel etc., will be made on a ‘risk-based’ approach as terms are undefined, and process is too complex to plan, test and implement.

The largest notional exposures to LIBOR are in Derivatives. Derivatives were the initial priority of the FRB ARRC. Derivatives were always assumed to be the first mover in the ‘Paced Transition Plan.’ Derivatives will be the catalyst for multi-product transition.