At the end of 2020, we identified the following key issues to have in mind as we entered the LIBOR “endgame”:

  • Readiness, meeting the milestones set by relevant industry groups
  • Right time, the need to communicate with customers in a timely way
  • Right information, communicating in a way that’s clear, fair and not misleading
  • Right rate, using a fair replacement rate
  • Remaining contracts, managing “tough legacy”
  • Record keeping, the importance, not least for senior managers, of having a record of decisions and their rationale

The PRA and FCA have reinforced all these points in a Dear CEO letter published on 26 March 2021, which is considered in further detail below.

The issues raised in this Dear CEO letter are not unexpected.  But that does not mean they are straightforward to manage. LIBOR transition remains a key challenge for financial institutions and a key area of regulatory scrutiny, and risk, throughout 2021.

While this guidance has been promulgated in a Dear CEO letter, it is impossible to miss that accountability for orderly transition is being placed on relevant Senior Managers, and the letter refers to a separate letter being sent to the senior managers at firms with the largest and most complex LIBOR exposures. The regulators have made it clear that failure to take appropriate steps in the remaining time will have consequences, highlighting that “As a key regulatory priority, we expect that this transition forms part of the performance criteria for determining their variable remuneration.


The Dear CEO letter says:

We expect all firms to meet the milestones of the Working Group on Sterling Risk Free Reference Rates (RFRWG) and the targets of other working groups and relevant supervisory authorities as appropriate.”

Any incident of sterling LIBOR-referencing loan, bond or securitisation issuance from Thursday 1 April onwards that expires beyond end-2021 would potentially be viewed as indicative of poor risk management and poor governance of transition.” Where customers are not yet ready to adopt a RFR-based alternative, the regulators highlight the availability of alternatives which can be used in the short term, rather than continuing to write LIBOR business that expires after the end of 2021, such as fixed rates, other floating rates or LIBOR products which expire before the end of the year.

In relation to non-sterling currencies, the letter says:

Given the significant exposures of PRA and FCA regulated firms to USD LIBOR, and the risks that continued use of USD LIBOR beyond the end of the year would create, firms should ensure they cease new use of USD LIBOR as soon as practicable and no later than the end of 2021, in line with the supervisory guidance issued by US authorities. Firms should take appropriate steps now to achieve this, and will be expected to demonstrate their transition progress by reference to the recommended timelines of the Alternative Reference Rates Committee (ARRC). Additionally, firms should support the transition to €STR before the discontinuation of EONIA on 3 January 2022.

In relation to new syndicated lending business specifically, the onus is put on the Lead Arranger but the letter is clear that: “Any new sterling LIBOR syndicated lending commitment after the end-Q1 milestone would be viewed as a collective failing of all the banks in the syndicate.” The regulators note with some concern that to date certain individual firms within syndicates have acted as a brake on transition efforts.

Moreover, Lead Arrangers are encouraged “to take a similar role in spearheading efforts to transition non-sterling and multi-currency syndicated lending away from LIBOR now, even where industry milestones differ from those of sterling.

The PRA and FCA also emphasise the importance of systems readiness, saying “We expect firms to prioritise resources to expedite the delivery of strategic front-to-back technology solutions for RFR to the greatest extent possible.” Firms are specifically warned about the use of tactical solutions to meet challenges to readiness; their use should be carefully controlled and managed according to the firm’s risk appetite.

Right information at the right time

The letter says “….firms should keep their customers appropriately informed about the impact of LIBOR cessation on existing and new financial products and services they offer or distribute. Information to clients should be presented in good time to allow customers to make informed decisions about relevant products and the risks to which they may be exposed.” This clearly leaves a lot to the discretion of individual firms, but particular care will be needed when counterparties are retail customers or small and medium sized enterprises.

Right rate

The guidance here is pretty predictable: “Wherever possible firms should use the most robust alternative reference rate to LIBOR appropriate for the applicable use case. In sterling this will often be SONIA compounded in arears in line with existing market practice in derivative and bond markets and with the use cases identified in loan markets by the RFRWG. In selecting benchmarks for use in their products, firms should take account of relevant industry guidelines and recommendations including the RFRWG’s use cases and the work undertaken by the FICC Markets Standards Board to establish a market standard on use of term SONIA reference rates. As an overarching consideration it is important that the selected replacement rate meets customers’ needs, and that customers understand the properties and implications of the rates they are moving to.”

Remaining contacts

As the “tough legacy” legislation works its way through the Parliamentary process, the PRA and FCA maintain that they expect “… firms to intensify efforts to execute plans to transition the stock of legacy LIBOR-linked contracts ahead of confirmed cessation dates of panel bank LIBOR, wherever it is feasible to do so” and that “All legacy sterling LIBOR contracts should, wherever possible, have been amended by end Q3 2021 to include at least a contractually robust fall-back that takes effect upon an appropriate event, or, preferably, an agreed conversion to a robust alternative reference rate.

It is anticipated that some contracts will not benefit from “tough legacy” legislation and the letter says “In instances where legislative solutions are not expected to be provided to support tough legacy exposures, firms should have robust plans in place to ensure all relevant LIBOR-referencing exposures are addressed. As the time for remaining action is short and reducing in every LIBOR currency, action needs to be front-loaded to deliver demonstrable progress against a risk-based prioritisation of contracts.”  With the ongoing uncertainty as to what is and is not “tough legacy”, this is a particularly challenging expectation to meet.

Again, syndicated lending is called out.  The letter says “Progress to date in actively transitioning legacy LIBOR-referencing syndicated lending facilities has been slow and, in common with new syndicated lending business, has lagged progress in other areas. We expect the Lead Arranger(s) and/or Agents(s) of legacy LIBOR syndicated facilities to proactively take steps to initiate the transition of syndicated facilities on a timeline consistent with meeting the milestones of the RFRWG and other working groups globally.”

But, perhaps more surprisingly, derivatives are also given special attention, and the letter says: “While the ISDA protocol provides a fall-back designed to enable derivative contracts to continue to function post cessation, firms should be prepared to demonstrate the steps they have taken to identify where an active transition would be more appropriate and how any residual risks from reliance on fall-backs will be managed. Mitigation of these risks requires proactive, timely and meaningful engagement with clients.” This is clearly designed to ensure that firms do not assume that they can rely entirely on the ISDA protocol to solve the issue in respect of their derivative books; not only must care be taken to monitor adherence but more complex positions will still need careful consideration.

Record keeping

As we have previously highlighted, it is critical to keep a good record of decision made and actions taken. In this regard, the Dear CEO letter refers to the need to monitor transition: “Firms should monitor progress of their transition efforts, including tracking and oversight of LIBOR transition risks, through the collection and use of meaningful conduct management information and data, including client outreach and any emerging risks, and escalate issues to senior management and the Board, if appropriate.”


Jenny Stainsby
Jenny Stainsby
+44 20 7466 2995
Rupert Lewis
Rupert Lewis
+44 20 7466 2517
Harry Edwards
Harry Edwards
+61 3 9288 1821
Nick May
Nick May
+44 20 7466 2617
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948