On Wednesday, 5 June 2019, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) published their eagerly awaited feedback on the Dear CEO (DCEO) letter on the discontinuation of LIBOR that was sent to the major banks and insurance companies in September 2018. The aim of the DCEO letter was to seek assurance on whether firms’ senior management and boards understood the risks associated with transitioning from LIBOR to alternative risk-free rates (RFRs) ahead of the end of 2021 and were taking appropriate and timely action.

The feedback document lists eight thematic findings and can be found here. Rather than summarising these, this blog focuses instead on what we regard as the key messages for firms – both those which did not receive the DCEO letter and also those which have received similar requests or letters from regulators in other jurisdictions (see the table below).

One thing is clear - the regulators were “surprised” by “the very different states of readiness for dealing with the transition and associated risks demonstrated by the plans submitted”[1]. This confirms that there is still much work to do - for some, a lot more than others - despite the progress made by the market to date. This emphasises why it is essential that firms which did not receive the DCEO letter review the regulators’ feedback now and act on those findings which are relevant for them, and for firms which have received specific feedback on their responses, to act on it accordingly.

The good news is that the PRA and FCA have made it clear that they are intent on working with the industry to deal with identified obstacles to transition. But firms cannot sit back and wait for these obstacles to be resolved. They need to move their transition programmes forward in parallel and at pace. The regulators’ expectations of them are now even clearer. The UK regulators have called last orders on LIBOR – no firm wants to find itself drinking in the last chance saloon.

Timeline and term rates

According to the feedback received, a small number of firms decided to use a base scenario which assumed at least some continuation of LIBOR beyond end-2021. On this the FCA and PRA are strong in their view that firms cannot let up in their LIBOR transition planning and proceed on the basis that LIBOR discontinuation will not happen at the end of 2021. This aligns with the recent remarks made by Randal Quarles, Vice Chair for Supervision at the Federal Reserve: “the regulator of Libor has said that it is a matter of how Libor will end rather than if it will end”.

Interestingly, some of the firms adopted a “wait and see” approach and flagged the need for market consensus and regulatory intervention as key dependencies for their transition planning. With regard to term-rates, Andrew Bailey made it clear that firms should not wait for forward-looking term rates to delay the transition to more robust rates[1]. Furthermore, in its recent user’s guide to SOFR, the Alternative Reference Rates Committee (ARRC) stated that: “those who are able to use SOFR should not wait for forward-looking term rates in order to transition”.

Management Information (MI)

For the senior manager responsible for LIBOR transition, as well as other relevant senior managers and committees, a clear message from the feedback concerns the importance of MI. The FCA and PRA describe how “some firms lacked the management information to provide a clear understanding of current LIBOR exposures”. The FCA and PRA state that the LIBOR transition programme would “very likely include nominating a senior executive covered by the Senior Managers Regime”. Firms that are able to supply quantitative and qualitative MI on their exposures and risks, and ensure these can be updated regularly, as well as granular MI on project progress (including actions and deadlines), will be better able to support senior management in discharging their duties under the Senior Managers Regime. In terms of the programme, the feedback highlighted how “only a small number of responses” demonstrated detailed resourcing work, e.g. in terms of staff and budget. The efforts required to develop a robust resourcing and budget plan for the coming years is significant, and firms should not delay undertaking this exercise. The report also noted that the strongest responses showed MI being used to prioritise how exposures are addressed based on agreed measures of risk and/or materiality.

We expect the regulators to focus on MI in their supervisory interactions with firms. But it is possible that if they find firms’ MI lacking they could look to other means of collecting data, such as requiring firms to complete standardised data forms. This appears to be the road that the Swiss regulator, FINMA, is looking to go down (see table below), as it has circulated a self-assessment questionnaire to firms seeking specific data on their exposures.

LIBOR exposures and risk management

One of the main findings shows that some firms were unable to assess correctly their exposures to LIBOR that are deeply embedded across their asset and liability structures, nor were they able to demonstrate a high level of infrastructure preparedness to perform a range of activities such as valuation, pricing or risk management. The need for a deep understanding of group and entity level exposures as well as intragroup dependencies is crucial for a correct risk assessment and identification of mitigants.

Overall, firms demonstrated some level of understanding of their risks, both on the prudential and the conduct side. However, the findings suggest that identifying risk mitigants proved to be more challenging for firms. Regarding prudential risks, a commitment to reducing the risk of a "cliff-edge" at the end of 2021 was singled out as being part of a “stronger response” and there is a clear steer towards using MI “to prioritise exposures based on agreed measures of risk and/or materiality (e.g. size, complexity and maturity)”.

The main conduct risks were associated with conflicts of interest, market abuse, disclosures and client miscommunication. It is important to note that the best responses demonstrated a very granular analysis of the firm’s customer base, their financial sophistication and their product set which then led to an increased understanding and a better plan for the mitigation of the risks as the transition progresses. In addition, in order to help mitigate conduct risks, it would be prudent for firms to focus on developing a comprehensive internal and external communication strategy to raise awareness and educate clients on the transition away from LIBOR.

Implications for global programmes

The FCA/PRA DCEO letter was the first key supervisory communication to firms on LIBOR transition. It prompted a wave of similar communications by other regulators around the globe, seeking to increase the pressure on supervised entities to transition away from IBORs and covering topics ranging from governance, prudential and conduct risks, through to the quantification of IBOR exposures (see table below for a list of regulators which have published their communication to firms). Given the similar ground that these communications covered, firms running regional and global IBOR transition projects should take heed of how the key messages arising from the PRA/FCA DCEO feedback could apply in other jurisdictions and in their responses to these regulators.

At the same time as dealing with the feedback from regulators, it is critical that firms do not lose sight of other key priorities. For example, the need for a new product launch strategy; the cessation of new LIBOR products maturing beyond 2021 by the Q3 2020 milestone set by the Working Group on Sterling Risk-Free Reference Rates; and how they will deal with “winners and losers”.

Next steps

As the end of 2021 grows closer, firms will have to demonstrate a greater degree of preparedness for the transition away from IBORs and stand ready for intensified supervisory scrutiny.

Based on the messages from the regulators, firms can expect bilateral communication and evidence-based supervisory engagement. As the transition progresses, further DCEO letters from the regulators across different jurisdictions, and especially in the UK, must be on the cards. Our view is that firms undertaking the transition away from LIBOR will benefit from being open in their engagement with regulators and from contributing to the problem-solving exercises initiated by regulators and trade associations. This will also benefit the wider market.


  1. Speech by Sir Dave Ramsden, “Last orders: Calling time on LIBOR”
  2. Recording of discussion on LIBOR transition in the UK between BoE, FCA and Working Group
  3. FINMA - Swiss Financial Market Supervisory Authority; HKMA - Hong Kong Monetary Authority; AFM - Netherlands Authority for the Financial Markets; DNB - De Nederlandsche Bank; ASIC – Australian Securities and Investments Commission; APRA - Australian Prudential Regulation Authority; RBA – Reserve Bank of Australia