The Financial Stability Board (FSB) published today a roadmap for the global transition away from Libor, setting out a sequence of actions that financial and non-financial firms should take between now and the end of next year.
“This roadmap is intended to inform those with exposure to Libor benchmarks of some of the steps they should be taking now and over the remaining period to end-2021 to successfully mitigate these risks,” the FSB said in a statement. “These are considered prudent steps to take to ensure an orderly transition, and are intended to supplement existing milestones from industry working groups and regulators.”
In the UK, the FCA and the Bank of England published a joint timeline earlier this year, with some major deadlines coming up this quarter and in Q1 next year. In the US, the Alternative Reference Rate Committee (ARRC) also outlined a set of targeted recommendations for a progressive reduction of the use of Libor in new contracts.
“The dates are fairly in line with those set by other regulators, but don’t go far enough to address the challenges around the assortment of risk-free rates (RFRs) that can be used per asset class,” said Navin Rauniar, partner at Tata Consultancy. “It will certainly put more pressure on market participants to accelerate their programme delivery and technology implementation, which is lagging behind globally due to the fragmented messaging stemming from the various Libor jurisdictions.”
The FSB’s roadmap can be seen as an attempt to unify the global messaging around the transition, Rauniar added. Some of its key steps include the necessity for firms to have identified and assessed all existing Libor exposures, and to have agreed on a project plan to transition in advance of end-2021. The FSB also strongly encourages firms to adhere to the International Swaps and Derivatives Association’s (Isda) upcoming fallback protocol, to which they can now subscribe in escrow.
“While this is unlikely to have an impact on firms’ plans in the UK and US, as these are already working to defined timelines, it may encourage firms in other jurisdictions to review their plans and move faster,” said a Libor transition director at a UK bank. “It’s a helpful reiteration of the messages that the ARRC and the FCA and BoE have been putting out, but I get the sense that it’s more aimed at other global jurisdictions, where the pace of transition is slower.”
The FSB adds that by the end of 2020, all firms should be in a position to offer non-Libor linked loans to customers – a message that concurs with the FCA’s target to end all Libor-linked issuance of cash products by end-Q1 2021. All firms should also have established plans to amend legacy contracts where possible by mid-next year, as well as implement the necessary system and process changes to enable the transition to robust RFRs.
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Earlier this year, the FSB had already reiterated calls for market participants to continue their efforts to transition to RFRs in spite of the impact of Covid-19. The imminent Isda protocol and impending central counterparty clearing discounting switch in the US this weekend are largely perceived as two catalytic elements that will mark an important turn in the Libor transition.
“We have now officially entered the end game,” Tom Wipf, chairman of the ARRC, said during a recent industry event. “We have completely shifted from the theoretical phase of putting out tools, to full execution mode.”
As we get close to the one-year-to-end point, Wipf added, there should be heightened levels of interest in how much can be done ahead to avoid a bottleneck at the end of next year. “Hopefully this will work as a real incentive for firms to progress as soon as possible, and to stop digging the hole,” he said.