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21-122MR Regulators expect Australian institutions to cease the use of LIBOR in new contracts before the end of 2021
Regulators in Australia are reiterating the importance of ensuring a timely transition away from the London Interbank Offered Rate (LIBOR). This requires ceasing the use of LIBOR in new contracts before the end of 2021.
On 2 June 2021, the Financial Stability Board (FSB) announced that all new use of LIBOR benchmarks should cease as soon as practicable and no later than the timelines set out by home authorities and/or national working groups in the relevant currencies. In particular, even though some USD LIBORs will continue until mid-2023, the US Banking Supervisors have stated that firms should cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by no later than 31 December 2021.
The FSB also released:
- an updated Global Transition Roadmap for LIBOR incorporating the confirmed LIBOR cessation dates and transition milestones set across the different LIBOR jurisdictions
- a statement encouraging the adoption of overnight risk-free rates (RFR) where appropriate, while recognising the role for use of forward-looking RFR term rates in some limited cases
- a statement supporting the use of the ISDA spread adjustments in cash products.
ASIC, Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) support the guidance and expectations set by the FSB and the US Banking Supervisors.
Continued reliance on LIBOR poses significant risks and disruptions to the stability and integrity of the financial system. Firms themselves may also face financial, conduct, litigation, and operational risks associated with inadequate preparation.
ASIC, APRA, and the RBA expect all market participants to adhere to the deadline at the end of 2021 for the issuance of new LIBOR contracts. They should also accelerate the active conversion of legacy LIBOR contracts.
ASIC Commissioner Cathie Armour said, “Firms should, as soon as practicable, stop the sale and issuance of LIBOR-referenced contracts that expire after their relevant cessation dates and most importantly, stop offering new LIBOR products after the end of 2021.”
RBA Assistant Governor (Financial Markets) Christopher Kent said, ‘Firms should not waste any time in moving away from LIBOR. The end date for LIBOR is clear and pending. Continued use of LIBOR after the end of 2021 poses significant risks to firms. There should be no new use of LIBOR – including USD LIBOR – after the end of 2021.’