Why the LIBOR replacement isn’t just about a new rate
March 11, 2020 • 4 min read
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.