LIBOR Transition Conduct and Compliance Risk Management

Do you fully understand the LIBOR Transition conduct and compliance risks during conversion?

The UK regulators have set clear expectations and obligations on firms

• The UK FCA and PRA have clearly demonstrated that good conduct and treating clients fairly is high on their agenda for transition to new interest rate benchmarks.
• Conduct must be embedded within a firm’s transition programme, it should be a constant, open-ended consideration across all other work streams, and it must be central to a firm’s strategic decision making.
• LIBOR Transition Conduct Risk is the risk that action or inaction by firms and their employees during LIBOR transition leads to client detriment or has an adverse impact on market stability or effective competition.
• Most Conduct Risks and scenarios are not new to LIBOR Transition (click here for more detail).  However, compared to existing risks they are unique and may be magnified because this is a market driven rather than regulatory driven transition programme, it is a global, multi-asset change with huge operational complexity and because the economic consequences of the conversion of legacy contracts will create ‘winners and losers’ all of which potentially give rise to incentives for misconduct.
• The regulatory obligation to treat customers fairly when replacing IBORs includes the following components:

(i) effective communication with clients to ensure they understand the risks of continuing to transact in LIBOR linked products in the short term and how new fallback provisions in existing contracts will operate;

(ii) helping clients understand the features and conventions of new risk free linked products (which are still evolving for some products and vary across jurisdictions);

(iii) the process for selection of replacement reference rates in contracts needs to be fair.

• The UK regulatory expectations are very clear.  The application of UK regulatory standards across EMEA and into the Asian and Americas regions creates additional  operational challenges with differences in regulatory expectations and approaches.  Firms who have clients with multiple cross entity and region relationships have the additional conduct and operational challenge of inconsistent messaging and approaches to LIBOR conversion which may lead to poor outcome for clients.
• The FICC Markets Standards Board has recently issued a Spotlight Review which provides helpful guidance on how to manage LIBOR
  Transition conduct risks and cases studies on the risks around the issuance or sale of new RFR linked products and buy-side risks.

The role of Compliance in LIBOR Transition – how are you doing?

• What is the specific role of Compliance, as a second line function, in your LIBOR transition programme – what are the functional deliverables and responsibilities?
• Do you have an active or passive role and voice in programme governance?
• Are your UK, EMEA and Global Compliance teams connected within your programme and sharing information and adopting similar conduct and compliance standards?  How are you managing remote booked business?
• What is your comfort level with your firm’s understanding and articulation of its key conduct risks and scenarios which need active risk management?
• Do you have a LIBOR Transition Conduct Risk Register?
• How well trained and engaged are your client facing employees and support function colleagues on their treating customers fairly and conduct risk obligations as the industry commences conversion discussions?
• How are you planning to differentiate clients by knowledge, understanding and complexity of products to manage client specific conduct risk issues?
• How have you developed your monitoring, surveillance and testing programmes to address LIBOR Transition and RFR product development?
• What management information have you developed to monitor the effectiveness of your conduct risk management programme?

How can Eiger Regulatory Partners (ERP) help you?

ERP can provide immediate help to firms who need dedicated Conduct and Compliance SME’s to work alongside programme resources and help drive the development and implementation of appropriate conduct risk and compliance control programmes.

• Building frameworks for the development and management of LIBOR transition conduct risk during client outreach and engagement (e.g. risk theme and scenario identification and risk mitigation strategies)
• The development and operation of conduct risk governance either within a firm’s existing Conduct Risk framework or as a standalone framework
• Advice on how to respond to and risk manage specific conduct risk issues during the engagement process
• Design and delivery of conduct risk training to client facing employees
• Advice on the FCA expectations and obligations of Senior Managers in LIBOR Transition and Conduct Risk Management
• Support in developing LIBOR specific conduct risk registers
• Independent reviews of the set-up of your LIBOR conduct and compliance programme
• Market intelligence on how other firms are managing specific conduct issues

Please contact James Ritchie to discuss your requirements