A number of key financial regulators around the globe are increasing the pressure on supervised firms to respond to the need to transition away from interbank offered rates (IBORs).

It started with the “Dear CEO letter” sent on 19 September 2018¹ by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to major banks and insurers supervised in the UK. The letter requested firms to submit a board-approved summary of the assessment of key risks in relation to the discontinuation of the London interbank offered rate (L)IBOR and the risk mitigation plan by 14 December 2018. The assessments and plans should consider a wide range of scenarios and impacts, and include a quantification of LIBOR exposures. Firms had to nominate the Senior Manager(s) taking responsibility to respond to the letter and to implement the transition plan.

The Swiss Financial Market Supervisory Authority (FINMA) issued guidance on 17 December 2018, with the intention to make firms aware of the challenges and the risks they will face when transitioning away from (L)IBOR. Shortly thereafter, on 14 January 2019, FINMA issued a self-assessment questionnaire² to around sixty financial institutions, mainly banks, but also asset managers and insurers to report on their (L)IBOR exposures and transition plans by 30 April 2019.

Other regulators have issued similar messages, including the Hong Kong Monetary Authority (HKMA)³, the Monetary Authority of Singapore (MAS) and the Federal Reserve Bank of New York.

Overview of messages issued via regulatory bodies

 

Country	Issued by	Issue date	Submission date	Link to the letter/questionnaire
United Kingdom	FCA & PRA	19 September 2019	14 December 2019	Dear CEO letter to major banks and insurers
Switzerland	FINMA	14 January 2019	30 April 2019	Self-assessment questionnaire
Hong Kong	HKMA	5 March 2019	No deadline	Letter to AIs

As we approach FINMA’s deadline, we took a closer look at the different components of the self-assessment. More than just a reporting exercise, we believe that financial institutions should take this opportunity to drive the reduction of related exposures and actively manage their risks. If they do so, the actual transition efforts can be considerably reduced.

A wake-up call - the FINMA self-assessment questionnaire:

One of the key objectives of the FINMA self-assessment request has already been achieved – it steered most of the small and medium sized institutions to increase their focus on the LIBOR topic and to set-up transition programmes.

Although some market participants have well-established programmes in place, others are just starting to organise themselves and seem to find the tight deadlines challenging as the required analysis entails significant work across the organisation.

The FINMA questionnaire focuses on four overarching areas in relation to the (L)IBOR reform readiness. Firms will need a clear transition programme structure to address the different aspects of the questionnaire.⁴

FINMA self-assessment questionnaire and the main areas of focus:



• Governance
− Involvement of senior executives and business sponsors
− Stage of the programme set-up, including planning, staffing, definition of governance framework and communication to senior management
− Monitoring of industry developments
− Allocation of budget for the transition programme in 2018 and 2019

• Impact assessment
− Exposures to (L)IBOR linked products by maturities, legal documentation, and risk profile
− Risk and valuation models, as well as accounting and tax models
− Consideration of impact based on different transition scenarios and trigger points – time of transition, speed of implementing new risk free rate (RFR) linked products
− Estimation of liquidity across new and existing products and implications of an abrupt and untimely discontinuation

• New products and financial institutions
− Consideration of new RFR-linked financial products and instruments
− Update of contractual templates and fallback language for new products approval process
− Assessment of necessary changes in the firm’s existing suitability processes

• Education, client outreach and communication
− Information about defined communication strategies to increase internal and external awareness of the underlying risks and issues related to the transition.
Financial institutions can also consider The National Working Group on CHF Reference Rates (NWG) checklist⁵ for additional topics to prepare for operational readiness.

Fill two needs with one deed

Rather than treating the completion of the questionnaire as a burdensome administrative task, financial institutions should seize this opportunity to proactively manage the transition. By taking the right measures early on considerable work, efforts and risks can be avoided ahead of 2021. We have identified a set of examples related to the focus areas in FINMA’s questionnaire that support a seamless transition to the new RFRs:

• Governance
− Establishment of a robust governance framework early on will help to align the overall transition to the firms’ strategic objectives. It will also enable the (L)IBOR reform programme to deliver within budget with an optimal utilisation of scarce internal and external resources
− Clear definition of roles and responsibilities across business functions will facilitate central tracking and monitoring of activities in areas such as Treasury, Finance, IT, Legal, Tax, Compliance and Risk Management

• Impact assessment
− Evaluation of product inventories will help firms to actively manage their portfolios with a goal of gradually minimising their exposures to (L)IBOR-linked financial products before the transition
− Early analysis of required changes to systems, models, curves and calculations (front to back) can be combined with other regulatory initiatives to manage interdependencies and reduce overall implementation costs

• New products and financial institutions
− Ongoing assessment of buy-side demand will help institutions to timely launch new products referencing RFRs
− Repapering and adoption of adequate fallback languages in legacy and new contracts will help minimise the risk of value transfer and facilitate client negotiations for the transition to RFRs
− Early review of procedural and policy changes will help assure accuracy and compliance for post-transition activities

• Education, client outreach and communication
− Early consideration of internal and external communication to impacted staff, senior management and clients will help increase the understanding on transition related implications and reduce conduct risks
− Communication with third parties (e.g. custodians, brokers, systems providers, etc.) without delay will help ensure adequate updates to systems and minimise third party risk

Conclusion

Regulators across the globe are increasingly undertaking measures to seek assurance that the firms’ senior management are taking actions to move away from (L)IBORs. The regulatory activities aim to mitigate the risk of a market disruption due to the transition, which is expected to take place by end-2021.
Financial institutions should seize this opportunity to anticipate developments prior to the transition, thus reducing the overall costs and risks associated with their (L)IBOR reform programmes.
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[1] https://www.fca.org.uk/news/statements/dear-ceo-libor-letter
[2] http://www.finma.ch/libor/EN
[3]https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2019/20190305e1.pdf
[4] Read more on our previous blogs - The cruise to SARON is departing: Mobilise a transition roadmap and LIBOR to SARON – A challenging and different transition
[5] https://www.snb.ch/n/mmr/reference/checklist_operational_readiness/source/checklist_operational_readiness.n.docx