Tue 02 Mar 2021

Discontinuation of LIBOR: UK Finance releases guide for banks and lenders

Last month we highlighted that the FCA, Bank of England and Working Group on Sterling Risk-Free Reference Rates had issued a joint press release to reinforce the nearing of the end of LIBOR and to remind all stakeholders in the market to get ready for its cessation at the end of 2021.  

UK Finance has since published a guide on the discontinuation of LIBOR for banks and lenders. The guide is intended to provide an overview of LIBOR transition and the current state of play in relation to market developments on its replacement. 

The guide considers the challenges presented by the transition away from LIBOR for stakeholders in the market and summarises the possible new reference rates which are available and how they differ from LIBOR and the potential difficulties they pose.

In particular, the guide highlights steps lenders should be taking in line with the timeline for cessation of LIBOR, including in relation to its governance, systems and operations and reinforces the need for lenders to identify as soon as possible all contracts which are currently subject to LIBOR so that all affected customers can be contacted to agree or negotiate an appropriate alternative. The guide highlights the huge operational task facing lenders and reminds lenders that the transition away from LIBOR is not just about finding a suitable replacement rate and documenting that in finance documents. 

The guide reminds lenders of the need to ensure proper training of staff, appointment of the right people to management the LIBOR transition project internally and the need to reassess their own portfolio in terms of price and risk.  The guide also summarises some of the key issues which need to be dealt with as part of the transition away from LIBOR, including fallback options when LIBOR ceases to be available, legacy contracts which cannot be dealt with for various reasons prior to 31 December 2021 and the role of the FCA in determining the applicable rate for those contracts.

The final section of the guide acts as checklist to assist stakeholders in complying with the schedule for cessation of LIBOR and to help them get ready ahead of the end of the year.  One of the biggest hurdles for lenders to be factored into this process is ensuring that their systems can accommodate an alternative reference rate and it is important that lenders are taking steps to get their processes, procedures and systems ready whilst also working on identifying their affected contracts, customers and the required amendments to facilitate a replacement of LIBOR.

The guide can be accessed here. Whilst primarily aimed at lenders and financial institutions, the guide may be useful to borrowers and their advisers and there would be merit in borrowers familiarising themselves with the terms of the guide.  

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