Buy-side makes significant progress in LIBOR switch

Investment managers have made significant progress in preparing for the switch from LIBOR to SONIA, new data from the Investment Association (IA) shows.

With the deadline for the transition now less than 18 months away, investment managers are stepping up their plans to move to SONIA, the new risk-free rate, by the end of 2021. Based on a survey of IA members representing £5.3 trillion of assets under management (representing 69% of total AUM managed by IA members):

• By the end of 2019, 92% of firms had assessed their exposure to LIBOR
• 70% had reduced their exposures to LIBOR in 2019
• 65% had invested in SONIA-based instruments in 2019
• 75% had an approved budget in place to complete the transition, with 25% of respondents’ budgets exceeding £2million
• By currency, highest exposures to LIBOR were most reported in relation to USD LIBOR followed by GBP LIBOR, with derivatives seeing the highest exposure by asset class.

To help investment managers complete the transition, the IA and EY have today published a joint report outlining steps firms should look to take, including:  

• Monitoring industry conventions and market liquidity by asset class and jurisdiction to ensure firms transition plans align with global developments;
• Assessing opportunities and risks for clients and incorporating this into the transition strategy;
• Embedding conduct risk and controls across all transition-related activity in line with regulatory expectations;
• Communicating with clients, counterparties and vendors, identifying concerns, and evidencing how these have been solved in the best interest of clients;
• Updating contracts and documentation across the firm to reflect the shift to SONIA and risk-free replacement rates for other currencies;
• Ensuring operational readiness for the transition with both internal and third-party providers.

Galina Dimitrova, Director for Investment and Capital Markets at the Investment Association, said:

“Investment managers have made significant progress in the transition away from LIBOR to SONIA and other alternative reference rates. With the FCA and Bank of England clear that LIBOR will cease to exist after the end of 2021, we strongly encourage investment managers, counterparties and vendors to work together in this final stretch to ensure a smooth transition, and reduce the reliance on LIBOR in all investments, operations and activities.”

Simon Turner, Wealth and Asset Management Partner at EY, said:

“The deadline to transition from LIBOR to SONIA and other ARRs is fast approaching, representing a major change in global financial markets. Although many investment managers may be progressing well with their preparations, there’s still important work to be done over the next eighteen months including how to manage sell-side dependencies and migrate ‘tough legacy’ products. Crucially, contracts need to be updated, conduct risk and controls need to be embedded and operational readiness needs to be established both within firms and with third party vendors to ensure a trouble-free transition for our clients and end investors.”