On 29 April, the Financial Conduct Authority (FCA) issued a statement on the impact of Covid-19 on the timeline for firms’ transition plans. While recognising the challenges which Covid-19 has created, the FCA’s central message is that firms, including asset managers, must continue with LIBOR transition.
In the statement, the FCA recognises the challenges presented by the current operating environment but emphasises that it is pleased to have seen continued progress on LIBOR transition. It cites various examples of the use of SONIA instead of LIBOR, but recognises that that it will not be feasible to complete transition away from LIBOR across all new sterling LIBOR linked loans by the original end of Q3 2020 target, noting that there will likely be continued use of LIBOR-referencing loan products into Q4.
The FCA nevertheless emphasises that progress is possible in other areas and it “will support the delivery of the working group on sterling risk-free reference rates workplan in key areas that will continue the momentum on LIBOR transition”.
This weeks statement follows a previous statement on 25 March (on which we commented) in which the FCA issued a warning to firms not to lose sight of their preparations for LIBOR transition.
The milestones noted in this weeks statement place a question mark over one of the milestones identified in the FCA’s Dear CEO LIBOR letter for asset managers of 27 February on which we also commented.
The statement suggests that it would no longer be necessary for firms to cease launching new products with benchmarks or performance fees linked to LIBOR by the end of Q3 2020. However, there is nothing to suggest that end of Q3 2020 as the appropriate date to cease issuance of GBP LIBOR-based cash products maturing beyond 2021 falls away. Nor does Q1 2021 as the date by which the transition of legacy LIBOR products, to reduce significantly the stock of GBP LIBOR referencing contracts, should have occurred. The other matters identified in the LIBOR letter for asset managers also remain live.
The FCA’s approach in the statement is consistent with the general disposition which law-makers and regulators have towards making changes to legal and regulatory change programmes incrementally and sticking for as long as possible to original timetables. Against this is the risk for them that the economic troubles that flow from the Q2 2020 Covid-19 disruption will hinder the transition for legacy contracts which may in turn hinder the LIBOR transition more generally. While the Covid-19 pandemic may have forced asset managers, like other FCA firms, to reorder some of their regulatory priorities to keep their businesses functioning, managers will need to be prepared to continue with their LIBOR transition programmes with a view to meeting the FCA’s expectations set out in the Dear CEO letter.