FCA starts second round of LIBOR transition reviews

24 July 2019

FCA starts second round of LIBOR transition

A number of firms have been contacted by the FCA regarding their readiness for LIBOR transition. The communication requires them to participate in meetings to assess the “nature and magnitude” of the impact LIBOR transition will have on the firm. The FCA is also seeking to understand the extent of preparations firms already have in place.

The scope of the firms covered is far wider than for the FCA’s first round of reviews, and is a follow-up to both the November “Dear CEO” to major firms and the FCA’s recent summary of findings regarding firms’ preparations to date. The regulator is clearly focusing on this area, so if you don’t have a watertight plan in place you’d be well advised to make it a priority.

What does the FCA expect in terms of LIBOR transition?

The latest FCA review requires firms to be able to evidence that they have done the following:

  • Quantified the extent of LIBOR (and other IBOR) exposure
  • Defined and described the risks resulting from a range of transition scenarios
  • Started to prepare and plan accordingly
  • Defined and documented their preparation and plans

The most recent FCA communication appears to focus on impacts. While not exhaustive (in the FCA’s words), their checklist already identifies five individual areas they expect firms to have identified impacts and commenced work:

  • Operational impacts, such as the need to update or re-engineer systems, to take account of LIBOR’s replacement
  • Client impacts such as the need to renegotiate and/or implement fall back provisions in existing contracts that extend beyond 2021
  • Market exposure impacts, such as the need to manage basis risk resulting from exposure to instruments with differing fall-back provisions or differing triggers, to transition
  • Business model impacts due to, for example, certain business lines being heavily dependent on LIBOR or LIBOR-linked products for their viability
  • Financing impact due to, for example, the firm’s funding model utilising LIBOR-linked instruments within its capital structure

What do you need to do?

It is clear that action is required – in fact, that it should already have commenced. If you have an active plan in place you should review it against the recent “summary of findings” from the FCA. If not, you should identify which “senior manager” is to be responsible for putting a plan in place, and give him or her the necessary support to create and follow out that plan.

How Bovill can help

If you have received the most recent FCA communication or are yet to formally begin planning for LIBOR transition, we can help. We have assisted firms in defining their exposures, creating their LIBOR transition plan, responding to FCA queries and also in executing the delivery of the plan.

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