UK Financial Conduct Authority ("FCA") Chief Executive Andrew Bailey urged regulators and market participants to accelerate efforts to transition away from reliance on LIBOR.
One year after delivering a speech in which he asserted that LIBOR is unlikely to be sustainable past 2021, Mr. Bailey said that the "pace of [the] transition is not yet fast enough." He credited progress made to date, but noted that there has been a continuing increase in the number of contracts that reference LIBOR and that will mature after 2021.
Mr. Bailey acknowledged a statement from the Financial Stability Board ("FSB") that identifies overnight risk-free rates ("RFRs") as the most suitable replacement for LIBOR and other interbank offered rates. In that report, the FSB continued to support development and adoption of overnight RFRs, emphasizing that these rates are well grounded in robust transactions and reflective of general interest rate movements as opposed to bank credit premia. The FSB contended that overnight RFRs are especially appropriate for the interest rate derivatives market, and encouraged a reduction of the use of term rates in that market. Notably, the FSB stated: "If future use of term rates is relatively narrow compared with current use of IBORs, for example if it is concentrated largely in a segment of the cash rather than derivative markets, this more limited use would be compatible with financial stability."
Mr. Bailey recognized that it may be impractical to amend certain legacy contracts that reference LIBOR. In the event that the UK determines that LIBOR no longer satisfies the conditions of the Benchmark Regulation, he said that institutions subject to that regulation may be allowed to continue to reference LIBOR in legacy contracts, but there would be a prohibition on new LIBOR-based contracts. Although this may provide "some comfort" with regard to legacy contracts, he also warned that there will potentially be a negative impact on "ability to manage and hedge legacy portfolios."
Mr. Bailey reminded firms that they will be required to meet disclosure obligations with regard to LIBOR-related business, and to demonstrate that there are plans in place to safely transition away from reliance on LIBOR. He asserted that firms must make disclosures on the risk of discontinuation for instruments that rely on LIBOR past 2021.
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