20 April 2021 – The FICC Markets Standards Board (“FMSB”) has today published a new Spotlight Review on LIBOR transition, looking at how market participants may manage potential conduct risks arising in back book transition.
This Spotlight Review aims to provide practical guidance for market participants and builds on a previous Spotlight Review which focused on moving new business off LIBOR. It has been developed by FMSB’s LIBOR Transition Working Group, which has representation from a wide range of FMSB member firms.
Back book transition covers long-dated derivative contracts and the need for parties to them to take steps before the end of 2021 to remove their remaining reliance on LIBOR benchmarks. Until July 2017 when it became clear that LIBOR would end, few contracts across the cash and derivatives markets envisaged a permanent cessation of LIBOR settings. Parties to long-dated derivatives contracts as well as borrowers and lenders are therefore exposed to uncertainty on LIBOR cessation if steps are not taken before the end of 2021. For these older legacy contracts, there are four broad transition or fallback options depending on the product and contract in question:
- Proactively transition LIBOR-based contracts to alternative benchmark rates in advance of LIBOR cessation
- Proactively amend legacy fallback language
- Rely on legacy fallback terms
- Rely on a legislative solution for tough legacy contracts
This Spotlight Review focuses on the first of these options given the benefits of actively converting contracts to another rate before the end of 2021. In particular, taking an active approach to transition enables market participants to take a degree of control over the impact of the transition on their contracts, reduce uncertainty and operational risk associated with waiting for LIBOR cessation and helps promote an orderly transition.
Nonetheless, as with the other transition and fallback options, proactively transitioning away from LIBOR-based contracts to alternative benchmark rates in advance of LIBOR cessation gives rise to a number of complexities which firms will need to manage in order to promote a fair and effective transition. In particular:
- There is a risk of value transfer depending on the timing of transition and subsequent benchmark rate movements.
- There may be mismatches in fallbacks for underlying cash and associated hedging instruments.
- Where firms are required to exercise some discretion, this may give rise to differential client treatment.
The Spotlight Review examines these complexities through practical case studies and sets out certain key considerations for banks and end users when looking at different transition options and good practice observations for managing the associated risks taking into account the overarching principle that firms ‘must pay due regard to the interests of [their] customers and treat them fairly’. 
Martin Pluves, CEO of FMSB, said: “With time fast running out to decide on the most appropriate steps for managing the transition of their back book positions from LIBOR onto risk free rates, firms must choose their course carefully. I am delighted to announce the timely publication of this Spotlight Review, the second in our series looking at conduct risks that arise in managing LIBOR transition.”
Chris Salmon, Chair of the FMSB LIBOR Transition Working Group, and Chief Control Officer for Markets & Securities Services at HSBC, said: “FMSB’s latest Spotlight Review is designed as a guide to help market participants treat customers fairly and support market integrity when they proactively transition their back book trading contracts from LIBOR to RFR benchmarks. Through FMSB’s LIBOR Working Group, we have drawn on a wide range of insights and expertise, both from FMSB member firms and the wider industry, to produce this practical Spotlight Review.”
The Spotlight Review is available for download here: fmsb.com
 PRIN 2.1, Principle 6 FCA Handbook
Notes to Editors
1) The Fixed Income, Currencies and Commodities Markets Standards Board (‘FMSB’) is practitioner led, funded by members and operated by the major participants in wholesale markets to improve standards of conduct in wholesale fixed income, currencies and commodities (FICC) markets. It aims to bring transparency to grey areas in the wholesale FICC markets by identifying emerging vulnerabilities, clarifying and documenting practice and agreeing standards to improve conduct and market behaviour. Ensuring that wholesale FICC markets are transparent, fair and effective for all participants is at the heart of FMSB’s mission.
FMSB Standards set out Core Principles and accompanying guidance on the most important aspects of practice where ambiguity risks undermining the transparency, fairness and effectiveness of markets.
FMSB Statements of Good Practice set out clear expectations and guidance on good practice in relation to broader areas of uncertainty in wholesale FICC markets.
FMSB Spotlight Reviews encompass a broad range of publications used by FMSB to illuminate important emerging issues in FICC markets. Drawing on the insight of members and industry experts, they provide a way for FMSB to surface nascent challenges market participants face and may inform topics for future work. Spotlight Reviews will often include references to existing law, regulation and business practices. However, they do not set or define any new precedents or standards of business practice applicable to market participants.
All FMSB publications are available on the FMSB website at fmsb.com/our-publications/.
2) Setting up the FMSB was one of the main recommendations from the Fair and Effective Markets Review (FEMR), which was conducted by HM Treasury, the Bank of England, and the Financial Conduct Authority.
FEMR set FMSB four strategic goals:
- Identifying global market vulnerabilities through scanning the horizon for emerging business practice risks.
- Developing best market practice through the production of standards and other materials that create a common understanding.
- Driving global adherence through ensuring standards are comprehensible and practical.
- Developing consistent approaches to market practices through identifying gaps and inconsistencies in existing regulatory standards and working with other standards setting bodies.
3) FMSB has a Standards Board drawn from senior executives from across wholesale markets, from corporate clients, asset managers, sell-side participants and intermediaries and infrastructure providers such as exchanges and custodians. In specialist, focused committees, subcommittees and working groups, industry experts debate issues and develop FMSB Standards and Statements of Good Practice, and undertake Spotlight Reviews that are made available to the global community of FICC market participants and regulatory authorities.
4) FMSB members bring together sell-side investment banks, buy-side asset managers, market infrastructure providers and exchanges, custodians and users of the market such as corporates. This constitution is unique.
The member firms are listed and available on the FMSB website at fmsb.com/who-we-are/