The Bank of England ("BoE") and the UK Financial Conduct Authority ("FCA") demanded clear evidence from firms of their participation in the market-wide transition from LIBOR, stating that "2020 will be a key year for transition."
In a letter to the nominated Senior Manager of individual UK banks and insurance companies, the BoE and FCA updated regulatory expectations as to progress on the LIBOR transition. Following extensive consultation with industry participants in 2019, the BOE and FCA made clear that "greater momentum is needed" from individual firms. The BoE and FCA emphasized their support for 2020 targets set by the Sterling Risk-Free Reference Rates Working Group ("RFRWG"), which include:
- enabling a greater shift of volumes from LIBOR to the Sterling Overnight Interbank Average Rate (or "SONIA") in the derivatives markets (supported by a statement from the BoE and FCA encouraging a switch in the convention for sterling interest rate swaps from March 2, 2020 on);
- ceasing the issuance of cash products that are linked to sterling LIBOR by the end of the third quarter ("Q3") of 2020; and
- creating a significant reduction in LIBOR-referencing contracts by the first quarter ("Q1") of 2021.
The BoE and FCA also expect firms to include the RFRWG's 2020 targets in project milestones and make management information available in order to track their progress. Specifically, the BoE and FCA urged firms to include action in their transition planning for Q1 in the following areas:
- product development;
- reviewing infrastructure, including updating loan system capabilities;
- client communications and awareness; and
- updating documentation.
In an effort to increase engagement with firms on the LIBOR transition, the FCA and the BoE's Prudential Regulation Authority ("PRA") stated that they will step up their supervisory activities. The FCA and PRA said they will review the management information and data required of firms in 2019 to determine whether firms are taking the necessary steps to prepare for LIBOR's demise by the end of 2021.