July 21, 2020 - The LIBOR transition encompasses far-ranging legal issues that impact the investment management industry, including the potential impact on trading and derivatives portfolios, fund performance targets within fund documentation, financing and brokerage arrangements, and a wide range of operational and other issues that need to be considered by managers.

Background

LIBOR (London Interbank Offered Rate) is used as a benchmark or reference rate in a wide range of financial instruments and is the primary recognized base rate for pricing loans, debt and derivative instruments across the market.

The UK Financial Conduct Authority (“FCA”) announced that it will not compel or persuade LIBOR panel banks to submit to LIBOR after the end of 2021, calling into question LIBOR’s existence after that date and accelerating efforts to adopt alternative benchmarks and fully transition away from LIBOR before it may cease.

In January 2020, the SEC’s Office of Compliance Inspections and Examinations (“OCIE”) identified registered investment advisor preparedness for the transition away from LIBOR as an examination program priority for the 2020 fiscal year. The full January 2020 OCIE Statement can be found .

OCIE Risk Alert

Following up on its January statement, on June 18, 2020, OCIE issued a risk alert emphasizing LIBOR transition preparedness as a 2020 examination program priority for registered investment advisors and provided details about the scope of these examinations. The Alternative Reference Rates Committee (“ARRC”), a group of private market participants convened by the Federal Reserve Board and the New York Fed, is currently leading a transition away from using LIBOR as a reference rate. In its place, the ARRC is recommending the Secured Overnight Financing Rate (“SOFR”) as an alternative reference rate to use when LIBOR is completely phased out by the end of 2021. The full risk alert can be found  and the ARRC site can be found .

OCIE LIBOR Transition Examination Focus

When evaluating LIBOR transition preparedness, OCIE will focus primarily on the following:

  • The current exposure to LIBOR-linked contracts that extend past the expected discontinuation date;
  • operational readiness associated with the transition to a new reference rate or benchmark;
  • communications to investors regarding the transition to alternative reference rates;
  • conflicts of interests associated with the LIBOR transition and how those risks are addressed; and
  • efforts to replace LIBOR with a new reference rate.

Next Steps

LIBOR transition issues have been a focus of the investment management community and a variety of industry groups (including ISDA, LSTA and MFA, among others) for some time. Fund managers should engage in strategic planning to address LIBOR transition issues by identifying exposure to LIBOR-based contracts and formulating a plan on how to address any contractual issues, including the use and inclusion of fallback contractual provisions in any impacted contractual arrangements. In addition, fund managers should continue to be active in industry discussion around benchmark reform and other industry responses to issues that also may be impacted by a LIBOR transition. It is also expected that fund investors will also make LIBOR transition preparedness a key due diligence focus in 2020 and 2021.