In a new report, the Financial Stability Board ("FSB") identified the remaining challenges concerning the transition away from LIBOR. The report is based on a survey on supervisory issues related to LIBOR transition that was sent to regulators across the globe.
The FSB found, among other things, that:
- continued LIBOR reliance "poses clear risks to global financial stability" and requires "significant commitment and sustained effort" from market participants across many jurisdictions;
- a number of "non-LIBOR" jurisdictions are not expected to see a significant impact from LIBOR cessation, but that there are many instances of a lack information or adequate assessment;
- financial institutions in LIBOR jurisdictions have shown to be "more advanced" to facilitate and monitor benchmark transition, with a wider range in preparedness among firms in "non-LIBOR" jurisdictions;
- many non-FSB jurisdictions do not have a LIBOR transition plan in place and are not monitoring institutional progress on transition;
- uncertainty about LIBOR closer to the end of 2021 "could also increase macroprudential risk" resulting from increased volatility in LIBOR-referenced markets;
- six jurisdictions have identified certain LIBOR exposures "which cannot be transitioned or which will be very difficult to transition" and the most common contemplated measure to address this concern was legislative action.
The FSB also made a series of recommendations, including that: (1) regulators and standard-setting bodies issue public statements to promote awareness (particularly for smaller financial and non-financial firms) of LIBOR cessation and associated risks; (2) regulators regularly request information from financial institutions on "key risks and action plans" and steps taken, "including identification of senior management responsible for transition"; and (3) regulators devote sufficient resources to support transition "through active monitoring and regular supervisory dialogue" and carry out "further desktop reviews or on-site examinations."
Commentary
This report is significant but, as it concedes on the first page, was based on questionnaire responses and analysis done before the COVID-19 pandemic and does not reflect more recent issues. Given the pace of change, firms should bear that in mind when reviewing the report and considering its recommendations. Financial institutions should also closely review the list of "major LIBOR transition risks" in Annex 3 of the report, which leads with operational and legal risks associated with transition.
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