As we move into the last nine months of transition away from sterling LIBOR, the regulators have written a ‘Dear CEO letter’ to CEOs of UK regulated firms
The process to transition linear derivatives (FRAs, Swaps) to a new RFR rate is now well understood. The issue of the transition of non-linear interest rate products, like options, is slightly more complicated. We can recognise this by observing that option prices are driven by more factors than just the underlying rate. For vanilla options, there are three main factors that drive the price, all of which will affect the fair transition process.
The Financial Conduct Authority (FCA) today formally announced the future cessation or loss of representativeness of the 35 LIBOR benchmark settings currently published by the ICE Benchmark Administration (IBA), which is regulated by the FCA.
Andrew Hauser, Executive Director for Markets, spoke at the recent Risk.net LIBOR Telethon. He said that following the announcements of recent weeks and subject to the ICE Benchmark Administration’s consultations, there can be little doubt that the LIBOR panels for sterling, yen, Swiss franc, euro and the less heavily traded dollar tenors will cease at the end of 2021.
In summary, LIBOR’s days are numbered and conversion to the new benchmarks, like SONIA, is a necessity - this will inevitably and unavoidably bring some challenges for corporates, but there is plenty of skilled assistance available to be called upon as the choppy waters are navigated and the calmer SONIA waters can be reached.
Following market consultation, the FCA announced that it was formally recognising the FX Global Code and the UK Money Markets Code on the 26th June. These are the first codes to be recognised under the FCA’s codes recognition scheme which was announced last year, to recognise industry codes for unregulated markets and activities. Both these codes have been written by and are owned by the industry and reflect their views of best practice.
The FCA has recently completed a review of four key areas in the market abuse systems and controls employed at several market-making firms. The firms were positioned in the small and mid-cap equity market making space but their findings are relevant to most trading firms which undertake a broad range of activities, where conflicts of interest could arise.
Last year the focus of the UK financial services regulatory landscape shifted from high-profile fines levied by regulators on banks for Libor and FX rigging towards individuals’ conduct and their responsibility for abuses.
