ACT Briefing Note - Transition to Risk Free Rate Benchmarks

In July 2017, Andrew Bailey, Chief Executive, Financial Conduct Authority (FCA), announced that banks would no longer be compelled to submit data to the LIBOR benchmark administrator after 2021 so effectively announcing the end of LIBOR.

In some respects, this should not have been a surprise as the G20 through the remit of the Financial Stability Board (FSB) recommended as far back as 2014 that market participants should move away from IBORs and consider using near risk free rates instead.

Taking a currency by currency approach, the various central banks whose currency would be impacted by a transition away from IBORs (e.g. USD LIBOR, JPY LIBOR, TIBOR) have identified alternative rates for their markets to move towards and the ‘LIBOR transition’ project is now moving into the implementation stage.

In August 2018, Andrew Bailey followed up his 2017 speech, reiterating that transition away from LIBOR will take place and that it was imperative that market participants were prepared.

Following this speech and in clear demonstration of how seriously the regulators are taking benchmark transition, in September 2018 the FCA and PRA (the Prudential Regulation Authority - together the regulators for the financial markets in the UK) sent a letter to the CEOs of the largest financial institutions requesting that they explain to the regulators their plans for transition.

As is often the way with developments in the financial markets, many things are outside of the treasurer’s control. Nevertheless, non-financial corporates need to:

• Understand what the transition away from LIBOR means for both treasury activities and the wider organisation (LIBOR is pervasive in many corporates), and
• Identify the steps needed to ensure a smooth transition for their organisation

The objective of this Briefing Note is to provide a starting point for corporates who currently use a LIBOR as a reference rate and need to be prepared to move to alternate (near Risk Free Rate - RFR) benchmarks ahead of the 2021 deadline.

This Briefing Note has been drafted with extensive input from the members of the RFR Corporate Forum and is structured as a checklist to assist corporate treasurers as they develop project plans for managing the transition.