• BCMstrategy, Inc.

QOTD -- LIBOR Transition: the ECB and the Bank of England speak

Risk managers and corporate executives could be forgiven for their inclination to delay LIBOR transition implementation. The shift will generate many expensive technology system upgrades. It triggers potential contract renegotiation issues with customers. It opens up the company to potential securities law liability if all risks are not fully disclosed during contract negotiations. Any shifts in risk profiles both for the underwriter and for the customer are impossible to determine completely given that most of the main new market-based benchmarks remain under construction.

The good news is that the European Commission and the European Central Bank (ECB) are aware of the problem. The ECB yesterday endorsed the Commission's proposal to by-pass market mechanisms completely and implement a broad-based replacement for LIBOR (and other inter-bank offer rates) by operation of law.

The bad news, of course, is that any such legal action creates additional risk management headaches since pricing structures will literally change overnight....whether or not financial firms are prepared. Moreover, as the ECB points out above, the legal action will impact all contracts denominated in a particular benchmark....regardless of whether or not the contracting parties are subject to EU law.

Lawyers will have a field day with this situation over the next year.

But wait....there's more. The Bank of England also spoke on the LIBOR transition topic yesterday. The Old Lady of Threadneedle Street remains focused on cajoling the private sector into taking the right course of action. They have moved from polite letters to slightly more strident language that highlights the risks associated with continuing to underwrite and maintain legacy contracts denominated in LIBOR rather than its UK replacement (SONIA):

Pandemic or not, policymakers are serious about moving to a new market-based pricing standard. Our patented PolicyScope Platform can help you avoid missing any key developments.


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