LIBOR Transition in Cash Markets Remains Slow: ASIC

Only 14 percent of post-cessation date loans have robust fallbacks in place, said ASIC’s Nathan Bourne at a Bloomberg-ICMA webinar. 

ASIC (Australian Securities and Investments Commission) has warned against a passive approach to LIBOR transition, and for regulated firms to make sure they mitigate possible conduct risks.

The total notional LIBOR exposure for key Australian institutions is declining and key firms are operationally ready, said Nathan Bourne, senior executive leader for markets infrastructure at ASIC.

He was speaking at a webinar hosted on Tuesday (25 May) by Bloomberg Professional Services and ICMA (International Capital Market Association) to launch an APAC guide on tough legacy bonds.

However, according to Bourne, the adoption of RFR products has been slower than expected, due to a lack of client demand and slow uptake of RFR products in the US.

Approximately 75 percent of post-cessation date exposures have adequate fallback provisions in place, when including both cash and derivatives products. However, progress has been slowed for cash products. Only 14 percent of post-cessation date loans have robust fallbacks in place, he said.

“The cash market is moving at a much slower pace than the derivatives market for both amendment of existing LIBOR contracts and the adoption of new RFR products,” Bourne said, noting that the extension in USD LIBOR has been welcomed by industry for this reason.

He warned against a passive approach to transition, i.e. a reliance on fallbacks and legislative solutions.

“Legislative solutions are designed to assist proactive transition by removing uncertainties and obstacles to active transition efforts,” he said. “No form of legislative solution will be broad enough to cover every single form of claims or disputes.”

“Active transition is the best method to mitigate litigation and conduct risks.”

Bourne said broad reliance on fallback language and legislative solutions does not prioritise positive client outcomes because it does not guarantee legal certainty and does not ensure firms and their counterparties are ready for the transition.

The best‑prepared firms have implemented controls and escalation processes to question the rationale of new LIBOR contracts, ensuring that clients can be offered alternative solutions, he said.

“Entities should adopt an outcomes-focused approach to the transition process. Your clients should understand the impact of the LIBOR transition and dependencies associated with the transition process.

Bourne highlighted that counterparties and clients may not have the same degree of knowledge, and that they may have a limited ability to negotiate terms.

“Buy-side entities have a duty to ensure their clients are not disadvantaged during the transition, especially in the contract negotiation process.”

Late last year, ASIC released an information sheet offering practical guidance on managing conduct risk during LIBOR transition. The guidance emphasised fair treatment of clients, the adequacy of disclosures, and the facilitation of client decisions through communication.

Bourne also noted that some participants have adopted a ‘wait and see’ approach to the transition, based upon an assumption that market convention may move towards a term rate.

On this, he said existing LIBOR-referenced contracts should be amended with the most suitable replacement rate based on clients’ objectives and needs, based on open and transparent discussions with clients.

ASIC intends to start a second round of communication with corporations and buy-side firms to highlight the urgency of LIBOR transition, providing guidance and clarification as necessary, Bourne said.

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