The FCA and PRA yesterday published a joint statement setting out their key observations from the responses of major banks and insurers in the UK to the Dear CEO letters published in September 2018, which asked for details of the preparations and actions being taken by those firms to manage transition from LIBOR to alternative interest rate benchmarks (SONIA in the UK).

The statement confirms that the FCA and PRA have reviewed responses from those firms and provided feedback directly. In addition, given the market-wide nature of the issue, they have decided to publish a number of market-wide observations which they have made in the course of reviewing the responses to the Dear CEO letters. The FCA and PRA identify a number of critical elements which were present in "stronger responses" to the Dear CEO letters, which are summarised below and provide some helpful guidance for other firms affected by LIBOR discontinuation.

As repeatedly emphasised by the FCA and PRA, given the widespread use of and reliance on LIBOR, there are significant risks associated with transitioning from LIBOR to alternative risk free rates. We considered in some detail the potential litigation risks in our article published in the Journal of International Banking Law and Regulation: LIBOR is being overtaken: Will it be a car crash? (2019) 34 J.I.B.L.R..

The stated purpose of the Dear CEO letter was to seek assurance that firms' senior managers and relevant governance committee(s) understand the risks and are taking appropriate action now. It is clear from the joint statement that there is real divergence across the market in terms of preparedness for LIBOR discontinuation. This latest communication is a further call to action from the FCA and PRA to ensure firms are properly prepared for the transition.

Good practice identified by the FCA and PRA for LIBOR transition

  1. Identifying reliance on and use of LIBOR beyond a firm's balance sheet exposure and assessing (for example) whether LIBOR is present in the pricing, valuation, risk management and booking infrastructure firms use.
  2. Quantification of LIBOR exposures using a range of quantitative and qualitative tools and metrics, keeping the metrics up to date.
  3. Nominating a senior executive covered by the Senior Manager Regime as the responsible executive for transition, with clarity on the senior manager's role in transition work.
  4. Developing a project plan for transition with sufficient granularity of detail, including key milestones and deadlines to ensure delivery by end-2021.
  5. Carrying out a detailed prudential risk assessment (subject to appropriate review and challenge), taking a broad view and considering all risks that could be relevant to a firm's operations. Aligning identified risks with appropriate mitigating actions.
  6. Identifying a range of conduct risks, including management of potential asymmetries of information and the potential for conflicts of interest, when forming and reviewing transition plans. Again, aligning identified risks with appropriate mitigating actions.
  7. Planning and managing risks on the basis of LIBOR discontinuation at the end of 2021, rather than assuming that it will continue in some form thereafter.
  8. Demonstrating a good understanding of and involvement in with relevant industry initiatives.
  9. Proactively transacting using new risk free rates or taking steps to incorporate robust fallback language.

In a speech given on the same date this feedback was published, Dave Ramsden (Deputy Governor for Markets and Banking at the Bank of England) made clear that regulatory scrutiny in relation to LIBOR transition will continue:

"More generally, I only see the level of supervisory engagement on this topic intensifying to make sure firms are ready for end 2021. The response to the Dear CEO letter provides a basis for this engagement to continue."

Firms (whether recipient of the original Dear CEO letter or not) should therefore reflect carefully on the published feedback. No doubt it will also be of interest to firms considering benchmark transition issues in other jurisdictions, notably in Hong Kongand Australia where the regulators have similarly asked firms to confirm their preparedness.