FCA Publishes “Dear CEO” Letter to Asset Managers

UK regulator, the Financial Conduct Authority (FCA), has published a “Dear CEO” letter to asset management firms, urging them to prepare for the end of Libor “now”.

In the letter from Nick Miller, head of asset management supervision at the FCA, it stresses that UK authorities have been clear that the intention is that Libor will cease to exist after end- 2021 and observes that the Financial Policy Committee stated in its Financial Stability Report that, “The continued reliance of global financial markets on Libor poses a risk to financial stability that can only be reduced through a transition to alternative risk-free rates (RFRs) by end- 2021.”

The FCA has written to all UK regulated asset management firms to set out its expectations for their firms as they prepares for the transition to risk-free rates. “We expect your firm to take all reasonable steps to ensure the end of Libor does not lead to markets being disrupted or harm to consumers, and to support industry initiatives to ensure a smooth transition,” the letter states bluntly. “Firms, such as yours, in the asset management sector, should be in no doubt that they have a responsibility to facilitate and contribute to an orderly end to Libor.

“It is essential that you reflect on the points raised in this letter and act as appropriate,” it continues. “Libor ending is a market event and the transition to alternatives is market-led. We expect you to take proactive steps now where appropriate and not to wait for instructions from clients. Firms should not expect or base their transition plans on future regulatory relief or guidance or on legislative solutions.”

The letter refers to documents published by the FCA and Bank of England in January which made it clear that firms need to accelerate efforts to ensure they are prepared for Libor cessation by end-2021, and that, 2020 will be a key year for transition. Referring to those targets, the FCA letter says they are intended to support the smooth transition of the industry to alternative rates ahead of end 2021. “The targets all have a direct read across for asset management firms, and you should consider how you might usefully adopt them in your firm’s Libor transition plans,” the letter states.

Reiterating the key message and quashing any lingering hopes of a delay to the transition, the letter goes on to state, “All asset management firms should assume Libor will cease after December 2021. If you offer products or services that are exposed to or dependent on Libor, you should consider very carefully whether your products and services will meet the needs of clients and perform in the manner expected after 2021. Where firms issue new products with Libor exposure beyond 2021, they may need to pay attention to whether such products comply with product governance rules.

“You should ensure all your operational processes are prepared for the transition to alternative rates,” it continues. “Libor is embedded in a wide variety of systems and infrastructure used for valuation, measurement and management, and in contractual relationships with clients and with other firms. We expect you to understand how your operations might be vulnerable to Libor cessation, and to take appropriate steps to protect your clients, your firm and the markets. Regulated firms retain full responsibility and accountability for discharging all regulatory obligations, regardless of any outsourcing arrangements that may be in place, whether intra-group or to third parties.”

The letter further calls for a “proportionate transition plan” if a firm retains material exposures to Libor, adding that the Board should have oversight of the transition process, and seek support and challenge from second and third lines of defence. Senior managers need to be aware of the risks, and firms to be clear about who is accountable for managing each aspect of transition where this is appropriate. “We think a smooth transition from Libor is most likely to be achieved if individual regulated firms actively engage with the wider transition efforts in the market,” the letter states.

“If your firm has Libor exposures or dependencies, your transition activities should now be underway,” the letter concludes. “If Libor transition is not yet underway at your firm, we expect you to take immediate action to develop and to begin to execute an appropriate plan. If your Board decides that no Libor transition plan is needed, we may seek to understand and, where appropriate, challenge the reasons for this decision. If, following careful review, your Board decides that a barrier to transition is insurmountable, or your transition preparations will not be completed in time, you should inform us immediately and keep us up to date on developments.”

Colin Lambert

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