FCA’s announcement on the end of LIBOR and its effect on Financial Institutions

BACKGROUND

• On 5th March 2021, the FCA announced the end of the LIBOR benchmark and the loss of indexality.
• Bloomberg Index Services Limited (BISL) has judged that FCA’s announcements apply to Index Cessation Event of ISDA protocol, and then confirmed the adjustment spread of all LIBOR (i.e. all currency and tenor) on 5th March 2021, based on “IBOR Fallback Rate Adjustment Rule Book”
• Through a press release, the IBA announced consultation results regarding the end of LIBOR’s benchmark at 4th December 2020, and showed that many market participants agreed to this consultation.
  

KEY CONSIDERATIONS

• Receiving the FCA’s statement, Cessation effective date after fallback spread has been confirmed. From this, the estimation of cashflow referring to LIBOR, which will be fixed after Cessation effective date will be categorized into the following 2 methods; a method which uses forward LIBOR and another method which uses forward OIS with adjustment spread. Currently, the former method has been used more in FIs, however, at some point in the future, this method needs to switch to the latter. One thing to note is that there may be some cases where the market price jumps discontinuously when there’s a difference in the market price. FIs need to carefully monitor the situation to determine the timing to transition from one method to the other.

• The Alternative Reference Rate Committee (ARRC) are repeating their advisory to end trades which refers USD LIBOR within this year. USD LIBOR is an important benchmark for Japanese FIs and firms. Since the end of USD LIBOR has been suspended for 18 months, leading some grace period for fallback correspondence referring USD LIBOR. On this occasion, each FIs and firms would like to complete organizing structure by proceeding structure for new trade of derivatives and financial products referring SOFR. We’d anticipate market makers to increase liquidity of derivatives referring SOFR. On the other hand, FIs and investors, who are on the buy side, needs to rush organizing the treatment system of financial products referring SOFR. This includes correspondence for systems with a high dependence on 3rd party vendor systems as well as risk management and clerical operations.
  

APPENDIX

• Annoucements on end of the LIBOR (FCA)
• ARRC Commends Decisions Outlining the Definitive Endgame for LIBOR (ARRC)]

The discussions and actions from various points of view throughout the LIBOR Transition process are an opportnity to strengthen risk management capabilities to uphold businesses rather than ad-hoc events. Throughout the transition process, Deloitte Tohmatsu comprehensively advises from accounting, tax, legal, financial risk management points of views.

• Logic and numerical survey regarding yield curves which accompanies LIBOR transfer (Japanese page)
  
  

Prior Artcles related to LIBOR is here
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