The FCA has recently published a Dear CEO letter to asset management firms concerning their preparations for the end of LIBOR.
In summary, the key points in the Dear CEO letter include:
- asset managers should assume that LIBOR will cease after December 2021. Should an asset manager offer products or services that are exposed to, or dependent on, LIBOR, they should carefully consider whether such products meet the needs of clients and perform in the manner expected after this date;
- asset managers should ensure that their operational processes are prepared for the transition to alternative rates. The FCA expects asset managers to understand how their operations might be vulnerable to LIBOR cessation, and take appropriate steps to protect their clients, their firm and the markets. Firms retain full responsibility and accountability for discharging all regulatory obligations, regardless of any outsourcing arrangements that may be in place, whether intragroup or to third parties;
- if an asset manager retains material exposures to, or dependencies, on LIBOR, it should have established a proportionate transition plan agreed by its board. If an asset manager believes that it has little or no LIBOR exposures or dependencies, the FCA would expect this view to be tested periodically, with oversight from the board;
- the board should have oversight of the transition process, and seek support and challenge from second and third lines of defence;
- asset managers need to prepare a transition plan that includes appropriate milestones, and is resourced adequately and devised holistically, across all relevant business functions. The plan should consider the risks arising from LIBOR transition, and identify appropriate mitigation;
- asset managers should consider which obligations may be triggered when making changes to product documents, such as requirements to notify the FCA or clients, before the changes are effected;
- where asset managers invest on behalf of clients in instruments which reference LIBOR, avoiding or managing the risks of LIBOR transition might involve investing in instruments that reference alternative rates or have fall-back provisions, and engage with issuers and counterparties to convert outstanding instruments to alternative rates or to add fall-back provisions;
- where asset managers invest on behalf of clients in third-party funds or segregated mandates that have benchmarks or performance fees, or hold instruments, that reference LIBOR, managing the risks of LIBOR transition may involve engaging with third party managers to switch benchmarks or performance fees to alternative rates or add fall-back provisions and on-going due diligence of third-party managers;
- any conflicts of interest arising from LIBOR transition must be mitigated or, where that is not possible, managed appropriately. Asset managers should prioritise LIBOR transition appropriately and not expose clients to unpredictable or unreasonable costs, losses or risks; and
- it is essential that asset managers reflect on the points raised in the Dear CEO letter and act appropriately. The FCA expects asset managers to take proactive steps where appropriate and not to wait for instructions from clients. Asset managers should not expect or base their transition plans on future regulatory relief or guidance or on legislative solutions.
The Dear CEO letter concludes with the FCA stating: “If your firm has LIBOR exposures or dependencies, your transition activities should now be underway. If LIBOR transition is not yet underway at your firm, we expect you to take immediate action to develop and to begin to execute an appropriate plan. If your Board decides that no LIBOR transition plan is needed, we may seek to understand and, where appropriate, challenge the reasons for this decision. If, following careful review, your Board decides that a barrier to transition is insurmountable, or your transition preparations will not be completed in time, you should inform us immediately and keep us up to date on developments.”