FCA Confirms Rules regarding Use of Synthetic Sterling and Yen LIBOR
The UK Financial Conduct Authority ("FCA") confirmed new rules regarding legacy use of the synthetic sterling and Japanese yen LIBOR for contracts that have not fully transitioned away from the benchmark rate by December 31, 2021.
synthetic LIBOR will be permitted for all legacy contracts except for cleared derivatives;
the FCA is requiring the publication of one-, three- and six-month tenors of sterling and Japanese yen LIBOR on a synthetic basis until the end of 2022, as proposed in the September consultation (see previous coverage) to allow more time to complete the transition and avoid market disruption;
the remaining U.S. Dollar LIBOR settings will continue to be published through June 2023, but will only be permitted for use in existing contracts; and
synthetic rates will not be available for use in any new contracts after December 31, 2021.
The FCA stated that the goal of synthetic rates is to mitigate the risk that comes from transitioning to an alternative rate, and assured market participants that the calculation methods are (i) "robust against manipulation" and (ii) "a fair, transparent and appropriate way of calculating synthetic LIBOR." According to a feedback statement, these methods have received support.
The new rules will become effective on January 1, 2022.
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