November 17, 2021 - by Tess Virmani. On November 16th, the FCA has confirmed it will allow the temporary use of ‘synthetic’ sterling and yen LIBOR rates in all legacy LIBOR contracts, other than cleared derivatives, that have not been changed at or ahead of the end of 2021. This announcement is in line with market expectations and confirms the FCA’s intentions described in the public consultation that the FCA launched in September. Importantly, the FCA further confirmed that the use of US dollar LIBOR will not be allowed in most new contracts written by supervised entities after December 31, 2021 – a position substantially, and intentionally, consistent with that of the US prudential regulators. The final notice by the FCA on the permitted use described above will take effect on January 1, 2022.

With respect to synthetic LIBOR rates, the FCA is using its powers under Article 23D(2) of the Benchmarks Regulation (BMR) to compel the IBA to publish 1-, 3-, and 6-month LIBOR rates for sterling and Japanese yen on a synthetic basis until the end of 2022. As announced in September when the FCA consulted on the methodology to be used in these synthetic LIBOR rates, synthetic sterling LIBOR will be based on Term SONIA together with the appropriate ISDA spread adjustment for each of the 1-, 3-, and 6-month tenors. Likewise, the synthetic yen settings will be based on Term TONA together with the appropriate ISDA spread adjustment for each of the 1-, 3-, and 6-month tenors. In the feedback statement published by the FCA on that consultation, this methodology was supported by a large majority of respondents. It is important to understand that the synthetic LIBOR settings will not be “representative” and so will not be available for use in contracts where fallback language includes a trigger event for LIBOR’s loss of representativeness. The FCA will send a final Notice to the IBA of its decision on January 1, 2022 and that notice will similarly be posted on the FCA website.

With six weeks until the end of the year, these FCA’s releases – while not unexpected – are important missing pieces to the LIBOR transition puzzle.

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