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FCA: coronavirus will affect LIBOR transition but 2021 deadline remains

Out-Law News | 01 Apr 2020 | 8:11 am | 1 min. read

The UK’s Financial Conduct Authority (FCA) last week acknowledged that the coronavirus pandemic will impact firms’ preparations for the end of LIBOR, but said the interbank rate is still set to be phased out by the end of 2021.

The FCA said in a statement “the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet”.

According to the regulator, the transition away from LIBOR was an essential task that would strengthen the global financial system. However it said that the Covid-19 crisis had had an impact on the timing of “some aspects” of the transition programme for many firms. The crisis could affect interim transition milestones in segments of the market which had so far made less progress, such as the loan market, the FCA added.

The FCA previously warned firms that it could make pre-emptive announcements about the future cessation or unrepresentativeness of LIBOR prior to the end of 2021, and said firms should keep transition plans up to date.

LIBOR is a measure of the average rate at which banks are willing to borrow wholesale, unsecured funds, and is used to price or value a wide range of financial products. The rate has become less reliable as the number of transactions underpinning the rate has fallen, while previous attempts at market manipulation and false reporting have also decreased confidence in the rate.

Banking reform expert Hugo Cassidy of Pinsent Masons, the law firm behind Out-Law.com, said: “2020 is a critical year in LIBOR transition strategies, as the regulator has made it clear that firms should cease to issue cash products including LIBOR exposures by the end of Q3 2020.

“Banks in particular will be under pressure to ensure systems can deal with transitioning away from LIBOR on to other rates (such as rates based on SONIA), as well as communicating changes to counterparties, updating template documentation and amending agreements with LIBOR exposures,” Cassidy said.

Cassidy said the uncertainty caused by coronavirus means that LIBOR transition strategies and timetables could come under pressure in the coming months although whether the FCA change their approach to relaxing any of the LIBOR transition milestones remains to be seen.

The regulator issued guidance in November last year telling firms to start making transitional arrangements ahead of the 2021 deadline, by moving away from LIBOR-linked products and reducing exposure to LIBOR. Cassidy said that financial services firms with LIBOR-linked portfolios should continue to monitor developments closely.