Money managers should protect clients from potential costs, losses or risks associated with a transition away from the London interbank offered rate, the Financial Conduct Authority warned on Thursday.
The FCA has sent a "Dear CEO" letter to U.K.-based money managers to set out its expectations for how firms should prepare for the end of LIBOR at the end of 2021. In the letter, the FCA warned that during the transition away from LIBOR, all clients should be treated fairly and kept informed about the ongoing changes. LIBOR is used by users of derivatives, loans and swaps, including pension funds, as a benchmark.
The FCA said money management firms operating strategies that are linked to LIBOR are expected to stop buying LIBOR-based swaps by the end of the third quarter of 2020, switching to alternative rate sterling overnight index average-based swaps.
Money managers should also consider not making any new investments in sterling LIBOR-based cash instruments that mature beyond 2021, according to the FCA. The letter said money management firms might need to consider developing new strategies that reference alternative rates.
Managers are also expected to ensure and oversee appropriate transitioning away from LIBOR by any third-party money managers with which their clients are invested. It applies to third-party strategies or segregated mandates that have benchmarks, or performance fees – or which hold instruments – that reference LIBOR, the FCA said.
With LIBOR embedded in systems and infrastructure used for valuations, money management firms will also be obligated to ensure their systems are prepared for alternative rates.