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16 March 2020

Regulators Turn Up The Heat On Asset Managers – LIBOR Transition

Lexi Whomersley

Lexi Whomersley
Senior Consultant | Capital markets | London

Following the ‘Dear CEO’ letters sent to Banks and Insurers in September 2019, on the 27th February 2020 the FCA wrote a letter to all UK regulated fund managers, in its strongest warning yet to move away from LIBOR-linked products. Asset Managers should now be “in no doubt” that they have a responsibility for assisting in the transition.

A Governance plan is required with senior oversight

The letter states strongly that firms “retain full responsibility and accountability” for understanding where LIBOR is across products and geographies within their organisation, as well quantifying the impact of the transition to alternative rates. While the FCA stops short of requiring the name of an accountable senior manager, it makes clear that the appropriate level of seniority must be involved. A “proportionate” plan must be set up that is overseen by a Governing Body – even if a firm believes that they do not have exposure, this must be tested regularly and evidence may be required.

Services offered and the fees linked to them may have to be changed

After increasing pressure on banks, the FCA has turned its attention to the buyers of financial products. All firms must assume that LIBOR will cease post 2021 and the letter highlights the potential conduct issues with continuing to offer products tied to this rate. In particular, it is noted that documentation and other affiliated literature might have to be amended for both new products and legacy transactions, if investing on behalf of clients through funds, collective investment schemes and/or segregated markets.

A strategy for informing customers is of particular importance, especially in being transparent when transitioning products to alternative rates, as well as ensuring clarity over performance fees and benchmarks that may have to be amended.

Key, pertinent dates from the recent BoE, FCA and RFRWG Documents

The letter comes weeks after the Bank of England, the FCA and the RFR Working Group published a series of documents outlining a transition plan. The letter highlighted three key dates:

Statement

Date

Implications for Asset Managers

Change the market convention for sterling interest rate swaps from LIBOR to SONIA in the inter-dealer market

2 March 2020

Many firms will invest in interest rate swaps on behalf of clients – new positions should now  be based off SONIA, where possible

Cease issuance of GBP LIBOR-based cash products maturing beyond 2021

End Q3 2020

When investing on behalf of clients, organisations should consider this deadline across all products. It is also sensible to use this deadline to stop offering new products or fees linked to LIBOR too

Establish a clear framework to manage transition of legacy LIBOR products

Significantly reduce GBP LIBOR referencing contracts by Q1 2021

A plan must be drawn up to reduce LIBOR exposures across investments

 

Next Steps

At Baringa’s last LIBOR roundtable event for Asset Managers, there was hope that the cessation from LIBORs would be driven by client demand – this letter will stop that thinking. Asset Managers must take immediate action to set up a robust programme that has senior manager oversight. Although the structure of your programme will be dependent on your size, scale and geographic footprint, we would recommend a hybrid programme with strong central leadership, which allows business divisions to take responsibility for the transition. Ever evolving industry developments must be considered and there should be a strong focus on mitigating conduct risk. With global regulators increasingly turning up the heat on organisations, setting up a robust LIBOR Transition programme must be on top of every firm’s agenda.

Find out more information on the LIBOR Transition.