FCA Urges Asset Management Firms to Prepare for LIBOR End

The Financial Conduct Authority (FCA) has today sent out a letter to the Chief Executive Officers (CEOs) of asset management firms, urging them to prepare now for the end of the LIBOR benchmark interest rate.

The Libor Libor Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Read this Term benchmark interest rate is set to terminate at the end of 2021. Therefore, the regulator has said that 2020 is a pivotal period for financial firms.

“We are writing to all UK regulated asset management firms as we wish to set out our expectations for your firm as it prepares for the end of LIBOR,” the FCA said in the letter sent out today.

“We expect your firm to take all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or harm to consumers, and to support industry initiatives to ensure a smooth transition.”

Furthermore, the British watchdog highlights that firms in the asset management sector have a responsibility to facilitate and contribute to the orderly end to LIBOR.

Recommendations from the FCA

So what recommendations has the regulator provided? Namely, the FCA states that firms should consider switching from LIBOR Swaps Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Swaps can be defined as a derivate contact composed of two parties that exchange to cash flow between two separate financial instruments.They are generally divided into two categories. This includes contingent claims (options) and forward claims, where forward contracts, swaps, and exchange-traded funds (ETFs) are exchanged. Commodity price, equity price, interest rate, and foreign exchange rate are common variables used as one of the cash flows in swaps upon initiation. Different Types of Swaps Read this Term to SONIA swaps now for new positions, where possible.

Furthermore, asset management companies should not make new investments in GBP LIBOR based cash products maturing beyond 2021 by end Q3 2020. The FCA has also urged companies to have a transition plan in place.

This plan should:

• carefully quantify all investments, operations, and activities with LIBOR exposures and dependencies for a firm and its clients
• consider both how the firm will remove or ameliorate existing exposures and dependencies in a timely manner and avoid creating new ones and
• include a strategy for keeping clients appropriately informed of such changes as they are developed and implemented

“It is essential that you reflect on the points raised in this letter and act as appropriate. LIBOR ending is a market event and the transition to alternatives is market-led,” the regulator explained in the letter.

“We expect you to take proactive steps now where appropriate and not to wait for instructions from clients. Firms should not expect or base their transition plans on future regulatory relief or guidance or on legislative solutions.”