Tuesday’s speech by FSB chairman (and NY Fed vice chairman) Randal Quarles emphasised everything we’d heard before from regulators about IBOR transition – it’s a question of when and not if. Nothing particularly new but lots worth noting:

  • regardless of how you choose to transition, beginning now would be consistent with prudent risk management;
  • it is crucial that everyone participates in the ISDA consultations on better fallback language for LIBOR derivatives and then signs the ISDA protocol so that these fallbacks apply to the legacy book of derivatives;
  • the ARRC fallback language for new issuance of cash products that refer to [US Dollar] LIBOR is now available, and as a matter of prudent risk management it, or something like it, should be used (the wording in many existing contracts was not designed for a permanent cessation);
  • for new deals, it is easier to stop using LIBOR. Even the best fallback language does not protect against all operational risks and economic risks (readers may hear an echo here of the BoE’s WGSRFRR chairman saying in May 2019 that the fallback wording was a safety parachute – it might save your life but would not be pain-free).

Quarles mentioned that the Fed and CFTC are working to ensure that rebasing older derivatives contracts did not bring them within the new rules for margining (in the EU, these would be under EMIR, where the same point arises). He made no mention of LIBOR living on for the cash market (one suspects for emphasis). On Wednesday a speech by David Ramsden, deputy governor of the Bank of England, made the same noises, and on the same day the PRA and FCA issued a 5 -page notice headed “Key themes, good practice, and next steps” to the same effect. Some key points:

  • Governance – a transition team reporting to key senior managers, including a senior executive covered by the Senior Managers Regime, with an end-2021 delivery deadline;
  • Engagement with the various industry solutions;
  • Contingency plans in case market solutions do not materialise;
  • Delaying decisions based on reliance on solutions with an uncertain delivery date (e.g. TSRR, or the term SOFR contemplated by the ARRC wording issued on 25th April 2019) may be imprudent, especially where alternative solutions are available;
  • Most firms which were not yet ready to transact RFRs have begun updating fallback language in new LIBOR issuances.

This is not the first time regulators on both sides of the Atlantic have acted in concert.