Back to Blog

Why the LIBOR replacement isn’t just about a new rate

Marketing Team


Why LIBOR replacement isn’t just about a new rate



Time is nearly up for LIBOR, with now less than two years left on the LIBOR transition timeline. This transition has been a long time coming for the London Inter-Bank Offered Rate which is due to be fully phased out by 2022. 

New rates have already been selected around the world and in particular, SOFR and SONIA have been identified for dollar and sterling-denominated markets respectively. The transition period has been going on for some time and this is by no means a simple process (with costs for some banks expected to be around $200m). However, what is the regulatory expectations for communications at such a crucial time?

In keeping with the post-crisis regulatory focus on transparency, both the SEC and FCA have been clear about how they want regulated firms to carry themselves and communicate this rate transition. We know what's replacing LIBOR, but what disclosure requirements are in place for firms?

 

What the SEC says...

New rate: The SOFR rate (or Secured Overnight Financing Rate) is a measure of the cost of borrowing cash on an overnight basis in the US Treasury repo markets.

Within the SEC, the Division for Corporate Finance has issued special guidance on this very subject. In particular, firms should consider:


• Regularly disclosing their transition status, especially as this timeframe may span several reporting periods.

• Disclosing information when it identifies a potential impact from the transition, even if it cannot yet estimate what this will exactly look like.

• Disclosing information used by management that could be useful to investors.

• Publishing both quantitative and qualitative data (for instance, referring to the notional value of contracts referencing LIBOR and extending past 2021).

• Overall, what risks could investors face from the transition?


What the FCA says...

New rate: The SONIA rate (Sterling Overnight Index Average) is an index that tracks rates of actual overnight funding deals on the wholesale money markets, unlike LIBOR which relies on submitters.

In a special guidance note, entitled ‘Conduct risk during LIBOR transition’, the FCA was clear in what it expects of firms when transitioning to the Bank of England LIBOR replacement. Essentially, firms:

• Must communicate information to customers in a way that is clear, fair and not misleading (therefore, still meeting the CONC 3.3.1 requirement incumbent upon all financial promotions).

• Should ensure all necessary information regarding the transition is presented in good time to allow customers to make informed decisions.

• Are encouraged to educate their audience about LIBOR and its cessation (as knowledge of LIBOR is likely to be lower among the wider public than within financial services).

• Should describe risks and impacts from LIBOR transition for existing products.

• Ensure wherever alternative options are presented for new products (or to change existing LIBOR-referencing contracts) that these are reasonably and fairly presented.

While there is no actual legislative framework in place, it's clear that regulators on both sides of the Atlantic want regulated firms to proceed with their LIBOR transitions in an efficient and responsible manner.

There are numerous resources and guides online as to how to manage internal transition processes, but emphasis is clear on several areas:

• Education (both internal and external).

• Ongoing reduction of legacy LIBOR exposure.

• Effective planning throughout organisations.

• Engaging with trade bodies, consultations and market-led initiatives.

• Research into each firms’ LIBOR replacement solutions and outputs.

At MirrorWeb, we’re written extensively on the subject of financial services marketing compliance. As websites are such a vital channel for regulated firms to market themselves to new clients, they have to meet all the regulatory requirements expected of them. As we’ve covered, when it comes to LIBOR transition preparations, it’s very important for regulated firms to consider the information they have presented on their websites.

At the same time, being able to demonstrate you comply with regulations is now almost as important as meeting them in the first place. Therefore, many firms use solutions such as the MirrorWeb Platform to create legally admissible records through web archiving, ensuring they can evidence what was published and when.

If you'd like to find out how our platform is helping regulated firms capture, archive and monitor electronic communications (and meet MiFID II, FCA, GDPR and FINRA requirements) then simply request a demo by clicking above.  

More from the Blog

How to Archive Your Google Optimize Content

If you're running Google Optimize to capture A/B tests, then read on to learn how MirrorWeb can capture all variants of your site

Read Story

The FCA's New Consumer Duty: The Role of Data Archiving

The FCA's new Consumer Duty comes into force in 2023, and the deadline for businesses’ implementation plans was October 31st 2022. Read on to find out what steps you can take to ensure you’re compliant.

Read Story

RegTech: Three Increasingly Regulated Industries

The regulatory technology (RegTech) sector is now growing at a pace of 19.5% annually. We take a look at three other industries (besides financial services) which are becoming increasingly regulated as time passes.

Read Story

See what we can do for you.

Let us show you why MirrorWeb is trusted by organizations across the globe for their compliance and digital preservation needs.