27 February 2020

Financial Times: City watchdog tells asset managers to stop using Libor-linked products

Asset management groups have been given the sternest warning yet that they must stop using investments and fee-structures linked to Libor — and cannot wait for clients to demand a move away from the tainted interest rate.

The Financial Conduct Authority sent a “Dear CEO” letter to all UK regulated fund managers instructing them to “take proactive steps” to switch their holdings of bonds and derivatives away from those currently based on Libor — the London interbank offered rate.

Regulators have been increasing the pressure on banks and financial services providers to make the transition to alternative risk-free rates by the end of 2021, after a series of scandals damaged trust in the Libor benchmark, which underpins roughly $400tn of products globally.

This week, the Bank of England sought to “turbo-charge” a move away from Libor-linked product issuance, toughening the terms of its lending to banks that offer collateral based on the old benchmark.

Now, the FCA is pushing the buyers of these products — the asset managers who hold them on behalf of clients — to make concrete plans to switch investments. Firms that buy interest rate swaps must consider changing to contracts based on the sterling overnight index average, or Sonia. Similarly, managers using Libor-linked cash products — such as bonds and loans — have been told that by September they should stop buying any securities maturing after 2021. They must also by the same deadline stop charging their clients fees based on outperformance of the Libor benchmark.

“We expect you to take proactive steps now . . . and not to wait for instructions from clients,” said Nick Miller, the FCA’s head of asset management supervision, stressing a need to prevent “markets being disrupted or harm to consumers.”

Advisers to fund managers said the regulators’ letter indicated an impatience with progress. “It is rare that the FCA spells out its expectations quite so starkly for firms,” said Fiona Lehane, a partner at PwC. “It’s very clear that the FCA doesn’t think that all firms have fully thought through all of the issues raised by Libor transition.”

Full article on Financial Times (subscription required)

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