Time To Abandon Hope: Senior Regulators Set Out Vision For LIBOR Transition In Latest Speeches

On 12 July, UK and US regulators sent the clearest warning signal yet to market participants on the need to abandon the London Interbank Offered Rate (LIBOR) and transition to alternative Risk Free Rates (RFRs). We circulated a briefing note to clients on 13 July regarding these developments. Andrew Bailey, Chief Executive of the Financial Conduct Authority (FCA), J. Christopher Giancarlo, Chairman of the U.S. Commodity Futures Trading Commission (CFTC), and Commissioners Brian Quintenz and Rostin Behnam, as well as the Financial Stability Board (FSB) released statements on benchmark reform.

The communications were co-ordinated, clear and broadly consistent. The overall message for those who might have been expecting LIBOR to continue in some shape or form post-transition was "abandon hope". This message was clearest and loudest from Andrew Bailey, but was also echoed by the other authorities. The authorities set out a future in which overnight RFRs would underpin the majority of transactions, with RFR-derived term rates being used for a minority of transactions. Importantly, they took the view that for some products, firms should not wait for term rates and could transition to RFRs for new contracts now. Fall back rates would also be predominantly based on overnight RFRs, but there was a very clear preference from Andrew Bailey for moving new contracts on to RFRs as soon as possible rather than continue to use a rate that firms know is going to be discontinued.

The FCA and CFTC set out clear expectations, including that firms demonstrate to supervisors that they have a good understanding of their financial exposures and risks and are making efforts to address them. Andrew Bailey detailed key obligations that firms owe their clients, including that they must disclose risks "in an understandable way" and consider whether certain investments remain suitable for particular clients.

The fact that these developments occurred on the same day - and almost one year exactly since Andrew Bailey's 2017 speech - demonstrates that the authorities are broadly aligned in their thinking and share a desire to accelerate the pace of transition to RFRs. Below, we set out exactly what happened on 12 July as well as further analysis of the most significant messages that came out.

What happened on 12 July?

Andrew Bailey gave a speech entitled "Interest rate benchmark reform: transition to a world without LIBOR". He also announced that the sterling RFRs working...