The end of LIBOR : are you ready?


 In a guest post from Gareth Parker and Tobias Sproehnle at Bovill, they provide insight into the urgent need to plan for the replacement of LIBOR. The OTC Space welcomes well written and insightful articles which are of practical benefit to our readers. If you have something you think might be suitable, please contact us. No charges apply, quality and relevance is what matters.


In less than three months, many firms must be able to convince regulators that they’re ready for the transition away from LIBOR. The ‘Dear CEO’ letter sent this week outlines what the FCA and PRA are expecting from major banks and insurers, but it also serves as a reminder to all LIBOR users to make sure they have a ‘robust written plan’.

The Bank of England has stated that it will no longer compel banks to submit rate estimations for inclusion in the LIBOR benchmark after 2021, and that as a result it expects users to adopt alternative benchmarks based on transaction data rather than estimations.

Now the FCA and PRA have moved things up a gear. Their ‘Dear CEO’ letter to major banks and insurance companies asks for information on firms’ readiness. By December 14th, recipients must provide:

  • a board-approved summary of the firm’s assessment of key risks relating to LIBOR discontinuation
  • details of actions they plan to take to mitigate those risks
  • identification of senior managers who will oversee the provision of the response to the letter and the implementation of transition plans.

Assessments and plans should consider an appropriately wide range of scenarios and impacts, and should include a quantification of LIBOR exposures.

All LIBOR users – not just the major banks and insurers – are already required under the EU Benchmarks Regulation to have a ‘robust written plan’ for the benchmark’s cessation. Tellingly, the regulators also ask those other users to ‘read and reflect’ on the letter. So if that’s your firm, it makes sense to make at least some of the same preparations.

Preparing for LIBOR changes – whatever they are

The Bank of England has clearly stated that LIBOR cessation should be treated by institutions “as something that will happen and which they must be prepared for”. However, there is some doubt as to whether LIBOR will in fact be ‘switched off’, and a number of banks have expressed interest in continuing to provide data to LIBOR.

Given this uncertainty, many LIBOR users are preparing for at least three possible scenarios:

  • complete and instant LIBOR cessation
  • a transition period (either gradual rollover as contracts expire, or a combination of this and renegotiation with clients)
  • LIBOR continuation.

In each case, significant work will likely be required within firms, and some discussions needed with firms’ clients, to:

  • quantify the extent of exposure
  • define and describe the risks resulting from the scenarios above
  • define and document mitigation plans.