September 30, 2021

FCA Consults on Synthetic LIBOR, Use of LIBOR Post-2022

In an effort to "ensure an orderly wind-down," the UK Financial Conduct Authority ("FCA") will require the publication of certain "synthetic" LIBOR rates for JPY and GBP.

In a Consultation Paper (CP21/29) and Feedback Statement (FS21/10), the FCA said it would designate the following six versions for continued publication on a synthetic basis beginning January 1, 2022:

  • one-month Sterling LIBOR,

  • three-month Sterling LIBOR and

  • six-month Sterling LIBOR ("Sterling LIBOR Versions"); and

  • one-month Yen LIBOR,

  • three-month Yen LIBOR and

  • six-month Yen LIBOR ("Yen LIBOR Versions").

The FCA explained that its chosen synthetic rates will "provide a reasonable and fair approximation of what panel bank LIBOR might have been in the future," but will not be considered "representative" under the Benchmarks Regulation. The FCA stated that the synthetic methodology will be (i) "forward-looking term versions of the relevant risk-free rate" and (ii) "the respective ISDA fixed spread adjustment."

In its consultation, the FCA proposed to permit legacy use of synthetic LIBOR in all contracts except cleared derivatives. The FCA did not propose to introduce further limitations on such legacy use during 2022.

In addition, the FCA proposed restrictions on UK institutions' new use of overnight, one-month, three-month, six-month and 12-month USD LIBOR settings, with exceptions for (i) market making relating to client USD LIBOR transactions executed before 2022, (ii) hedging transactions entered into before 2022, (iii) novations of transactions executed before 2022, (iv) transactions entered into for purposes of participation in central counterparty auctions following a member default and (v) for interpolation within contractual fallback arrangements for those USD LIBOR settings ceasing at the end of 2021.

Comments on the Consultation Paper must be submitted by October 20, 2021.

In addition, the FCA responded to feedback on its powers as to critical benchmarks (Article 23A).

Commentary

The FCA had previously indicated that it expected the definition of “tough legacy” contracts would be drawn narrowly. The approach proposed in the consultation, however, permits a much wider degree of legacy use by UK institutions across many product classes. While this provides a welcome degree of flexibility and will prevent UK institutions breaching the UK BMR in January 2022 (in relation to legacy contracts), there remains a clear regulatory expectation that LIBOR transition should continue apace in relation to all contracts which are practical to amend.

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