November 17, 2021

FCA Confirms Rules regarding Use of Synthetic Sterling and Yen LIBOR

Nihal Patel Commentary by Nihal Patel

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.

In the Notice of Prohibition and Draft Notice, the FCA confirmed the following rules:

  • 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.


Annex I of the Notice of Prohibition includes additional detail on the exceptions for "new" use of USD LIBOR in 2022. Given the similarity of the FCA terms to the guidance of U.S. banking regulators, the FCA statement should be noted even by market participants outside of firms directly regulated by the FCA. In particular, (1) the FCA recognized that firms engaging in "market making" in response to clients reducing or hedging USD LIBOR exposure from pre-2022 contracts may result in market makers accumulating USD LIBOR risk; (2) the FCA indicated that it expects market makers to "make all reasonable efforts to ensure that the client is aware of the prohibition," but does not expect a market maker to "validate on every occasion the intention of the client in relation to the proposed trade"; and (3) the prohibition on "new" LIBOR in 2022 does not bar new USD LIBOR basis swaps entered into in the interdealer broker market.

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