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FMSB releases Spotlight Review on managing conduct risks in LIBOR transition

Posted: 22/06/2020

The latest Fixed Income, Currencies and Commodities (FICC) Markets Standards Board (FMSB) ‘Spotlight Review’ on LIBOR transition, published on 11 June 2020, is essential reading for anyone struggling with the issues and practical implications of the discontinuance of LIBOR.

The FICC represents market participants in the wholesale markets and concentrates on market conduct issues. Unsurprisingly, therefore, the report highlights the market conduct risks to participants but it also includes a summary of the key practical issues and applies them to four case studies - (i) bilateral/syndicated loans (ii) loans with interest rate swaps (iii) loans with cross currency swaps and (iv) funds manager switching performance benchmarks.

Key conduct issues that are highlighted by the report include:

  • the need now to be offering cash product borrowers a choice between LIBOR (with robust ‘fall-backs’) or RFR for facilities beyond 2021;
  • the importance of providing clear information (despite the challenges) to borrowers and the need to encourage them to take independent advice; and
  • the need to understand a cash borrower’s hedging strategy to ensure a fair and effective approach.

The Spotlight Review is not legal advice and it cannot be relied on as a substitute for PRA/FCA rules or guidance. However, it is useful practical background, not only for sterling but also the US dollar and other products.

As well as conducting detailed LIBOR transition project reviews of current facilities for clients over the past year, Penningtons Manches Cooper has also been advising for some time that for regulatory and commercial risk reasons, new RFR products must be offered. This is borne out by the Spotlight Review:

The conduct risks of striking new LIBOR-referencing transactions that mature after the end of 2021 are rising.

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