Preparing for the discontinuation of LIBOR
16 Oct 2018
London Interbank Offered Rate (LIBOR) is the reference rate underlying many derivative contracts, securitisations and loans. It is also used extensively in risk, valuation and commercial contracts within insurance companies.
Following the financial crisis, banks have moved away from unsecured term borrowing in the inter-bank market. The reduced level of activity has prompted questions around the sustainability of LIBOR as a benchmark rate.
On 19 September 2018, the Prudential Regulation Authority and Financial Conduct Authority wrote to the CEOs of large banks and insurance companies in relation to the likely discontinuation of the LIBOR and the transition to alternative reference rates by the end of 2021. Firms will need to provide a response to this letter by 14 December 2018, including an assessment of the firm’s key risks relating to LIBOR discontinuation and details of plans for mitigating these risks.
In this newsflash we discuss:
- What the letter sets out;
- Why LIBOR is likely to be discontinued;
- What LIBOR may be replaced with;
- Some of the potential implications of transitioning from LIBOR to an alternative reference rate; and
- What firms need to be doing next.
This is far from a theoretical exercise – change is coming. The impacts for firms will be wide-ranging, but those who start making preparations now will be best placed for a smooth transition when LIBOR is likely to be discontinued in 2021.