LIBOR transition: Important questions for directors and corporate treasurers

The London Interbank Offered Rate (LIBOR) is a widely used benchmark interest rate. In July 2017, the UK Financial Conduct Authority (FCA) announced that it will no longer compel panel banks to submit to LIBOR after 31 December 2021: see FCA, The future of LIBOR, speech, 27 July 2017.

We recognise the transition away from LIBOR to be a significant priority. Since 2018, we have highlighted publicly the need to prepare for the transition. Over the past few years, we have provided guidance and clarification for the industry, including letters to the CEOs of key Australian institutions and guidance on how to mitigate operational and conduct risk during the transition away from LIBOR.

We strongly urge all directors and corporate treasurers to act now and take the necessary steps to ensure an orderly transition away from LIBOR.

Can LIBOR still be used in new contracts?

We have communicated to all financial institutions that they should completely cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and no later than 31 December 2021.

The impact this has on companies is that they need to be operationally ready for alternative reference rates (ARRs) and their related products by the end of 2021. This means that companies need to ensure that systems and processes can accommodate financial contracts that reference ARRs. Systems may need to be updated and tested to support new conventions.

What should I do to transition away from LIBOR?

All directors and corporate treasurers should conduct (if they have not already done so) a LIBOR ‘stocktake’ and identify all areas of their company that are affected by LIBOR. Identification should not be restricted to financial contracts and investment holdings. It should also be considered whether LIBOR is used as, or as a part of, discount rates in valuation and risk models, or if it is used in accounting methodologies and tax treatments. LIBOR could even be used in non-financial contracts and disclosure documents. All parts of your company should be reached out to, to ensure they are aware of the need to identify LIBOR. If the company has large exposures, it may have already started the transition process. If not, directors and corporate treasurers should contact their firm’s banks and financial services providers and act now.

Which rate should I use?

When deciding on which rate to use, it is important to consider whether the rate is robust and suitable to the company’s objectives and needs. Directors and corporate treasurers should discuss their options with their banks and financial services providers.

We recommend ARRs endorsed by the relevant regulators and working groups:

LIBOR currency	Alternative reference rates
USD LIBOR	Secured overnight financing rate (SOFR) and CME Group's forward-looking SOFR term rates
GBP LIBOR	Sterling overnight interbank average rate (SONIA)
EUR LIBOR	Euro short-term rate (€STR)
YEN LIBOR	Tokyo overnight average (TONA)
CHF LIBOR	Swiss average rate overnight (SARON)

When is the best time to transition to ARRs?

We recommend that all directors and corporate treasurers act now. There are significant risks associated with a failure to prepare adequately for the transition away from LIBOR. All directors and corporate treasurers should examine their LIBOR exposure now and take necessary steps to ensure an orderly transition.

Who should I contact?

Engage with your bank and financial services providers now to find out how they can assist with the transition away from LIBOR. Most of the major financial institutions have dedicated client support programs that will help you make informed decisions.