UK watchdog tells asset managers to gear up for end of Libor

By Huw Jones
FILE PHOTO: Canary Wharf and the City of London financial district are seen from an aerial view in London

By Huw Jones

LONDON (Reuters) - Britain's fund managers must be ready to stop using the Libor interest rate benchmark before it disappears at the end of next year, the country's finance industry watchdog said on Thursday.

The London Interbank Offered Rate or Libor is being phased out after banks were fined billions of dollars for trying to manipulate it. The benchmark, used for pricing trillions of dollars of swaps, futures and loans worldwide, is set to cease by the end of 2021.

"If your firm has Libor exposures or dependencies, your transition activities should now be underway," Nick Miller, the Financial Conduct Authority's head of asset management supervision, said in a so-called "Dear CEO" letter to asset management bosses.

"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."

Miller said each plan should quantify all Libor exposures, include a strategy for informing customers, list milestones, and be resourced adequately.

Fiona Lehane, a partner at consultants PwC, said it was rare for the FCA to spell out its expectations so starkly, and it was clear the watchdog does not think that asset managers have fully thought through the issues raised by Libor.

British regulators want market participants to switch to a benchmark known as Sonia, an overnight interest rate compiled by the Bank of England.

Regulators have so far focused on banks to make sure they are prepared for Libor's demise, but the markets watchdog said asset managers "should be in no doubt" they too have a responsibility to contribute to an orderly end to the benchmark.

"Firms should not expect or base their transition plans on future regulatory relief or guidance or on legislative solutions," Miller said.

The FCA said asset managers are users of swaps, an off-exchange traded derivative contract, on behalf of clients. Asset managers should now consider switching from Libor to Sonia-based swaps for new positions from March 2.

The watchdog said asset managers should also look to meet a September 30 deadline for ending the use of Libor in new cash products like bonds, loans and securitisations.

Each asset management firm must also be clear on who is accountable for ending the use of Libor, a reference to a regime that allows the FCA to punish named individuals whose failure in specific areas creates risks for markets and customers.

"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," Miller said.


(Reporting by Huw Jones; editing by Carolyn Cohn, Jane Merriman and Alexandra Hudson)