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LIBOR transition - the final stretch

With less than a year to go, internal audit has an opportunity to add value by providing challenge and highlighting unmitigated risks to management as organisations complete the final stages of the transition away from LIBOR.  

LIBOR transition programs aim to enable smooth transition from reliance of LIBOR to alternative risk-free rates (RFRs)1. With the FCA’s confirmation in March 2021 of the cessation dates2 for all LIBOR settings, we can expect that firms are ramping up their efforts to achieve an orderly transition.

The March 2021 FCA & PRA Dear CEO Letter is essential reading.

Internal audit teams reviewing their organisation’s LIBOR transition program might want to consider the varied risks posed by the transition, some of which are highlighted in the questions below:                      

Governance and oversight

  • Are senior management’s roles and responsibilities clearly defined and allocated throughout the transition programme?
  • Is there adequate change control and monitoring over the transition program’s scope, schedule and costs?
  • Are there adequate validation processes to confirm that milestones completed have met the program’s objectives?
  • Has there been adequate representation within the program across businesses, functions and jurisdictions? Is there sufficient oversight from the 2nd Line, including risk, finance, legal and compliance?

Management information

  • Does the firm have complete and accurate records of its LIBOR and RFR exposure data, and of client exposures to be used for client outreach?
  • Does management have adequate KPIs that sufficiently monitor progress and alignment to the timelines set by the regulators and various industry working groups?
  • Does management have a process in place for the continuous identification, reporting and mitigation of risks and issues throughout the transition?

Legacy exposures

  • Does management have a detailed strategy on how to manage the firm’s LIBOR legacy exposures by product, currency, tenor and maturities? This could include reviewing contracts to ensure they cover robust pre-agreed conversion terms, amendment of contracts by end Q3 2021 to include a contractually robust fallback that takes effect upon an appropriate event or an agreed conversion to a robust alternative RFR.
  • Where management are pursuing active transition to RFRs, does the transition happen well ahead of the confirmed cessation of the LIBOR tenors?
  • Have management established controls to restrict and monitor new LIBOR exposures with maturities beyond 2021?

Operations and systems readiness

  • Have management created strategic solutions to accommodate the use of RFRs in new and existing products? If tactical solutions have been taken, are they robust enough to handle increasing volumes of RFR-linked products?
  • Have system changes gone through the appropriate software development cycle and is there clear traceability among business requirements, code changes and user acceptance testing?

Conduct risk mitigation

  • Have management clearly identified the conduct-related risks arising from the transition activities, including risks related to conflict-of-interest, mis-selling and fair pricing, inadequate communications, anti-trust, and market abuse, and have started implementing the respective mitigating action plans?
  • Does management have a communication strategy that ensures clients, investors and other stakeholders are continuously informed about the risks and impacts from LIBOR discontinuation for existing LIBOR-linked products?
  • Does management have adequate training plans and communication guidelines updated for client-facing employees?

Finance, tax and model Risks

  • Have management identified models impacted by the transition to RFRs, particularly where risk models (i.e market/liquidity/credit risks) are changed due to impact of new funding curve/credit spread linked to RFR-linked products?
  • Have change requirements to these models been defined and remediation prioritised, particularly those requiring internal validation and regulatory approval?
  • Have management assessed the impacts of the transition to the firm’s accounting and financial reporting as well as tax treatments?

Internal Auditors should think about using data analytics, for example, examining new lending activities to obtain additional assurance over the effectiveness of controls for cessation of new LIBOR-linked products, as well as on existing lending activities to confirm accurate identification of the back book for transition.

Is your internal audit function asking these questions?

The clock is ticking.


1 RFRs are based on overnight transaction data, which differ from LIBOR rates that are set on a forward-looking basis for seven tenors. RFRs are lower than LIBOR because as the name suggests, they do not include the premium for one Bank taking on the credit risk of another Bank.

2 Publication of all LIBOR settings will cease immediately after 31 December 2021 except for the ON and 12-month USD LIBOR settings which will cease immediately after 30 June 2023.

Content reviewed: 1 February 2023