03.10.2020

UK Regulators: Letter On LIBOR Transition

Joint letter from Bank of England and FCA to trade associations on how LIBOR transition will affect their members and stakeholders and next steps to take:

FAO: Trade Association Chairs/CEOs,

How the discontinuation of LIBOR may affect your members and stakeholders

You may know that a major transition is underway to switch from the interest rate benchmark LIBOR to alternative ‘risk-free’ rates. We at the Financial Conduct Authority (FCA) and Bank of England are writing to you to set out how this will affect your members and stakeholders. We want to ask you to help raise awareness among your networks, and to offer you some practical help to do this task, including a free online training session.

Why LIBOR is ending and when

The LIBOR benchmark relies on estimates from banks of their borrowing costs in markets which are no longer active, so is not considered sufficiently robust or sustainable given its widespread use. The FCA has secured agreement from banks that they will keep contributing to LIBOR until the end of 2021. This will give users time to switch to alternative rates before LIBOR is discontinued.

Continuing to rely on LIBOR after this point will create a number of risks to firms. One of these is a lack of clarity over the legal position and interest payments due for contracts that refer to LIBOR rates. The process of transition in the UK is being overseen by the Working Group on Sterling Risk-Free Reference Rates (RFRWG). The RFRWG was convened by the Bank of England and FCA and is made up of a wide range of firms including banks, asset managers, non-financial corporates, trade bodies and professional services firms.

How this will affect your organisation, stakeholders and members

We expect this transition will affect most British businesses in some way, including small nonfinancial organisations. So, it is likely to affect some of your members, stakeholders, or clients they may advise. For example, LIBOR may be used in bank loans to companies, or in contracts between non-financial companies which have arrangements for payments which add interest.

Where your members or stakeholders rely on LIBOR, they will need to take action to ensure the end of LIBOR does not cause disruption to their business, and to give them certainty about how their obligations to pay or entitlements to receive interest will be affected after the end of 2021.

The rest of the letter can be read here

Source: Bank of England

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