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FCA Publishes Speech on Firms’ Progress To Transition From LIBOR to Alternative Risk-Free Rates

On February 21, the UK Financial Conduct Authority (FCA) published a speech by Megan Butler, the executive director of supervision—Investment, Wholesale and Specialists at the FCA, on firms’ progress in transitioning from the London Interbank Offered Rate (LIBOR) to overnight risk-free rates (RFRs).

The FCA and the UK Prudential Regulation Authority (PRA) are in the process of analyzing firms’ responses to their Dear CEO letter in which they requested a comprehensive assessment of the potential prudential and conduct impacts associated with the LIBOR transition being carried out (as reported in the September 28, 2018 edition of Corporate and Financial Weekly Digest).

The FCA and PRA’s initial observations are that UK banks and insurers are at different stages of being prepared for the transition. Although the FCA and PRA noted that most firms have provided good evidence about their transition work, some firms did not hold their first transition leadership meetings until after receiving the Dear CEO letter. The rate of transition has also been lower on the buy-side than on the sell-side. In the derivatives markets, the FCA believes that some of the reasons they have heard for the delay in moving to alternative RFRs are not justifiable, such as waiting for liquidity to develop, waiting for term rates to be produced based on new overnight RFRs and dealing costs.

The FCA therefore encourages asset managers to:

  1. Conduct due diligence to identify their LIBOR exposures, including hedging strategies using LIBOR-referencing interest rate derivatives, and investments in bonds or other securities in which interest payments refer to LIBOR;
  1. Transition their hedges and positions to the Sterling Overnight Index Average reference rate ( SONIA) before LIBOR disappears and before liquidity in LIBOR derivatives begins to decline; and
  1. Plan for LIBOR to discontinue at the end of 2021 across all of its tenors and currencies, and review or re-paper contracts. Firms can adopt different approaches to this as the FCA has not prescribed a specific approach.

The FCA’s speech is available here.

©2020 Katten Muchin Rosenman LLP

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About this Author

John Ahern, Financial Attorney, London, Katten Law Firm
Partner

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.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

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
Partner

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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