Article

LIBOR Transition

Setting up your firm for success

Regulators globally have signalled clearly that firms should transition away from the London Interbank Offered Rate (LIBOR) to alternative overnight risk-free rates (RFRs).

LIBOR underpins contracts affecting banks, asset managers, insurers and corporates estimated at $350 trillion globally on a gross notional basis. This figure underscores the extent to which market participants rely on LIBOR and demonstrates that a sudden and disorderly discontinuation of the rate could give rise to systemic risk. The rate is so embedded in the day-to-day activities of providers and users of financial services, both unregulated and regulated, that even identifying a firm’s exposures to it – which is just one element of what is needed to transition from it successfully – is a highly complex task. Against this background, many market participants have already embarked on transition programmes, but, as some regulators have pointed out, the pace of transition is not yet fast enough. This in part is because of the absence of any formal regulatory or legal mandate. It is vital that Boards take action now to avoid reputational, legal and commercial risk later.

The discontinuation of LIBOR should not be considered a remote probability 'black swan' event. Firms should treat it is as something that will happen and which they must be prepared for. Ensuring that the transition from LIBOR to alternative interest rate benchmarks is orderly will contribute to financial stability. Misplaced confidence in LIBOR’s survival will do the opposite.” Andrew Bailey, Chief Executive, Financial Conduct Authority (FCA), July 2018 

 

The purpose of this paper

This paper is intended primarily for all types of financial services firms. However, many of the points set out are also relevant to corporates and other end-users of LIBOR products. This paper is designed to help Board members and executives understand what is needed to drive transition.

Given the degree of uncertainty and complexity, LIBOR transition is likely to be one of the (if not the) biggest transformation programmes many firms have undertaken. 

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