Supporting members with the transition away from LIBOR has remained a key priority for the IA throughout 2021. From the end of 2021, LIBOR will be phased out by jurisdictions around the world – by that point there should be no further issuance in the UK of LIBOR-linked instruments and all outstanding LIBOR-linked securities should have been transitioned to a new rate.
The IA and its members have been strong supporters of the LIBOR transition process throughout, and have demonstrated that support through a number of initiatives. These include:
Engagement with working groups
The IA and a number of its members sit on the Working Group on Sterling Risk Free Reference Rates, established to support the transition of LIBOR to SONIA. Likewise, the IA and many of its members also sit on many of the working group’s sub-groups, focused on specific areas of the LIBOR transition process, including bonds, derivatives and loans. The IA has also established its own internal LIBOR Transition Working Group, providing a forum for investment managers to discuss and address issues related to LIBOR transition.
Publication of educational material and guidance
The IA has produced educational material for its members, guiding them through the transition process, including the 2019 LIBOR Transition Roadmap for Investment Managers, and the 2020 report ‘Time To Act Now: LIBOR Transition for Investment Managers’. In addition, the IA has hosted educational webinars and roundtables on the topic. We are also aware that many of our members have also produced their own educational material, aimed at guiding their clients, as well as the issuers in which they have invested, through the LIBOR transition process.
Communication with issuers and public calls for transition
At the behest of its members, the IA published an open letter in February to issuers of LIBOR-linked GBP bonds, calling on issuers to initiate transition plans as soon as possible, and to highlight investor support for past LIBOR transition consent solicitation processes. This letter was positively received, and has led to further conversations with issuers.
An 'orderly wind-down'
On 29 September, the FCA made announcements on orderly wind-down of LIBOR and also released a consultation paper on its proposed treatment of legacy LIBOR instruments. The consultation set out a broad proposed scope for the use of synthetic LIBOR – an artificial LIBOR set by the FCA and designed to help smooth out issues with tough legacy products until the end of 2022, when it will be reviewed. In our response, we were supportive of the proposals in general, but highlighted some instruments where there still may be issues – including Fix-to-Float instruments. The Group has also produced a paper on this issue which it has shared with the FCA.
The transition away from LIBOR to new risk-free rates generally progressed well. However, there were some persisting issues which proved challenging for members, both in terms of confirmation of the regulatory approach as well as the timeline to make any changes by the deadline of end of December 2021. Tough legacy products more generally - ones that continue to have a LIBOR element and are active beyond December 2021 – remain a concern to members.
Next Steps for the IA
The LIBOR Transition Working Group will meet in January 2022 to take stock of the transition and discuss any outstanding issues.
Reject Code Standardisation
As part of the IA’s ongoing commitment to effective FX markets, the Investment & Capital Markets Team, along with the FX Committee, has called for standardisation of reject codes.
Standardisation of Reject Codes
Reject codes are electronic indicators sent out by liquidity providers when they reject a client's trade, to give a proximate reason as to why. Asset managers will analyse trades in order to ensure they are achieving best execution for their clients. The lack of standardised reject codes, however, impacts the ability of asset managers to rapidly analyse rejections to remedy any operational or procedural errors and raise issues with liquidity providers.
IA Position Papers
The IA’s first call for reject code standardisation in electronic FX markets was published in early 2020, when the IA published a paper setting out a number of proposed standardised codes and requested that liquidity providers begin to implement them when issuing trade rejects. A lack of progress on the part liquidity providers to implement these codes, due in part to the COVID-19 pandemic, led to a further call by the IA in August 2021, reiterating concerns and calling on liquidity providers to provide code mapping to asset manager clients by the end of Q3 2021, with full implementation to follow in the first half of 2022. The timing of the IA’s publication came shortly after updates to the FX Global Code which saw new language added calling for greater transparency around the use of reject codes.
Following the publication in August of the IA’s position paper, the IA, alongside the Chair and Deputy Chair of the FX Committee, held a series of bilateral meetings with representatives of major banks and FX trading platforms in order to encourage progress.
The IA has now received indications from many major liquidity providers and trading platforms that progress is being made on standardisation and that implementation is expected in Q1/Q2 2022.
As we move forward into 2022, the IA will continue to engage with liquidity providers to maintain forward movement on implementation and seek widespread adoption of the proposed codes.