FCA has written a Dear CEO letter to asset management firms on preparing for the end of LIBOR. It expects firms to take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or consumers harmed. The letter stresses the importance of industry-led transition to alternative risk-free rates and says firms should not await instructions from clients but should be proactive now. Firms should assume LIBOR will cease after December 2021 and should consider very carefully whether their products and services will meet client needs and perform as expected after 2021. In particular:
- Firms should now consider switching from LIBOR swaps to SONIA swaps for new positions where possible;
- Firms should consider not making any new investments in GBP LIBOR based cash products maturing beyond 2021 by end Q3 2020, and the target of end Q3 2020 is also sensible for firms to consider when planning to cease launching new products with benchmarks or performance fees linked to LIBOR; and
- Firms must act now if they do not already have in place a plan to manage transition of legacy LIBOR products.
The letter also urges firms to ensure their operational processes are prepared for the transition, and have a proportionate transition plan if the firm has material exposures to dependencies on LIBOR. The Board should have oversight of the transition process, with appropriate support and challenge. Statements of Responsibility should include responsibilities arising from LIBOR transition plans. Where firms operate products that reference LIBOR they will need to consider what obligations may be triggered when making changes to product documents. Where firms invest on behalf of clients in relevant instruments they may need to engage with issues to convert outstanding instruments to alternative rates or add fall-back provisions, or engage with managers of relevant funds or mandates to do so. In all planning, firms must be alert to how to manage any conflicts of interest that may arise, ensuring that all clients are treated fairly and not exposed to unpredictable or unreasonable costs, losses or risks.
The letter finishes by urging firms to contact FCA immediately should their Boards consider a barrier to transition is insurmountable.