May 25, 2020

FCA Publishes LIBOR Dear CEO Letter

On February 27, the UK’s Financial Conduct Authority (FCA) published a “Dear CEO” letter regarding the London Interbank Offered Rate (LIBOR) (the Letter). In the Letter, Head of Asset Management Supervision at the FCA, Nick Miller, noted that “LIBOR will cease after December 2021” and that asset managers must “prepare now for the end of LIBOR.”

This is the latest in a series of statements from the FCA and the other UK financial regulators urging firms to transition from LIBOR to overnight risk-free rates (RFRs), including a “Dear CEO” letter in February 2019 (for more information, please see the March 1, 2019 edition of Corporate & Financial Weekly Digest) and a suite of documents published in January by the Working Group on Sterling Risk-Free Reference Rates (RFRWG, available here).

In the Letter, Mr. Miller reiterated the FCA’s position that “LIBOR ending is a market event and the transition to alternatives is market-led…Firms should not expect or base their transition plans on future regulatory relief or guidance or on legislative solutions.”

He also explained, specifically, the role that the FCA expects asset managers to play, both as investors in instruments and funds that reference LIBOR and as operators of such funds. The FCA expects asset managers to engage with their third-party providers to develop and offer new products that reference RFRs and to convert existing products to these alternative rates. Firms must ensure that clients are treated fairly through the transition and are not exposed to “unpredictable or unreasonable costs, losses or risks.”

In particular, Mr. Miller noted the product governance implications of the LIBOR transition to RFRs. The potential pricing difference between LIBOR and the alternative RFR could alter the original target market assessment for a fund or its underlying instruments. Any change to the target market assessment could have repercussions for an investment product’s distribution strategy, the investment advice given to a client and applicable suitability assessment(s), which should be revised accordingly.

The other sections of the Letter focused on the governance tasks presented by this transition. For example, the FCA expects firms to develop a transition plan, with oversight from the Board, which incorporates all relevant priorities and milestones and is monitored throughout its execution.

Finally, Mr. Miller referenced a LIBOR Q&A, which sets out the FCA’s expectations regarding the LIBOR transition and the Senior Managers and Certification Regime (SM&CR). As a first step, firms must identify the senior manager who is responsible for the LIBOR transition and ensure that the Statement of Responsibility and Responsibility Map (if applicable) are updated. For more information on SM&CR, please see the December 20, 2019 edition of Corporate & Financial Weekly Digest.

The Letter is available here and the FCA’s LIBOR Q&A is available here.

©2020 Katten Muchin Rosenman LLP

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John Ahern, Financial Attorney, London, Katten Law Firm
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John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
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Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
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Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
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Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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