With support from both APRA and the RBA, ASIC has written a letter to the CEOs of major Australian financial institutions to ensure they are taking the necessary steps to prepare for the end of LIBOR.
According to the three regulators, LIBOR (London Interbank Offered Rate) is “deeply embedded in financial markets globally” and is relied upon by many Australian financial institutions in their contracts and business processes.
However, the UK Financial Conduct Authority (FCA) has stated that it will no longer use its powers to sustain LIBOR beyond 2021.
The key problem, as summarised by RBA deputy governor Guy Debelle, is that “there are not enough transactions in the short-term interbank funding market to reliably calculate the benchmark.”
He continued, “The banks that make the submissions used to calculate LIBOR are uncomfortable about continuing to do this, as they have to rely mainly on their ‘expert judgment’ in determining where LIBOR should be rather than on actual transactions.”
ASIC’s letter aims to clarify that the senior management of the Australian financial institutions in question “fully appreciates the impact and risks” associated with the upcoming change, and are preparing to weather the transition to alternative benchmarks by the end of 2021.
The regulators are urging relevant institutions to:
- be aware of the size and nature of their exposures to LIBOR
- put in place robust fall-back provisions in contracts referencing LIBOR
- take action to transition to alternative rates
ASIC commissioner Cathie Armour has encouraged firms to take “timely action to plan for a world in which LIBOR is no longer available.”
“Financial regulators around the world expect institutions using LIBOR to be ready to transition to more robust benchmarks,” the RBA deputy governor added.
In a speech in March, RBA assistant governor Christopher Kent said, “The various LIBORs have long been the key interest rate benchmarks for the major currencies. However, given that they are not supported by a sufficient volume of transactions in wholesale short term funding markets, it is now widely recognised that these will come to an end.
“When LIBOR comes to an end, there could be disruptions for many existing products referencing LIBOR unless their contracts contain robust ‘fall-back’ provisions,” he added.