October 4, 2021 - by Tess Virmani. On September 29th, the Financial Conduct Authority (FCA) announced that it will compel IBA to publish the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings, under a “synthetic” methodology based on term risk-free rates, for the duration of 2022. It is important to remember that these 6 LIBOR settings will be available only for use in legacy contracts and are not for use in new business, however, the FCA is now consulting on its intention to permit the use of these settings in all legacy contracts for the duration of 2022. The additional year of legacy use for these settings would offer some necessary breathing room for market participants to complete the remediation of legacy contracts in an orderly fashion although it is critical to remember that the synthetic settings will no longer be “representative” for purposes of the Benchmarks Regulation. In a related announcement, the FCA confirmed the “synthetic” methodology that would be used by IBA: the forward-looking term versions of the relevant risk-free rate and the respective ISDA fixed spread adjustment.
The liberal proposed use of synthetic sterling and yen LIBOR settings for legacy contracts in 2022 will surely be met with relief from market participants. The FCA was clear, however, that the permitted use of these settings will be directly related to the progress it sees in the remediation of legacy books by market participants. The FCA has no intention of compelling IBA to publish synthetic yen LIBOR rates after 2022, but they can do so for synthetic sterling LIBOR settings for up to ten years. The FCA will review its decision annually noted that it “will also consider progressively restricting continued permission to use synthetic LIBOR in legacy contracts if this would help maintain progress towards an orderly cessation…if, for example, work to reduce stock of outstanding legacy LIBOR contracts does not continue.” While the FCA is the regulatory supervisor for IBA (and thus all currency tenor setting of LIBOR), the proposed powers on which it is consulting will directly affect only entities and contracts within the scope of the BMR.
The FCA’s announcements also addressed aspects of the remaining settings of USD LIBOR. The FCA clarified that, with respect to a synthetic version of certain USD LIBOR settings, the FCA continues to monitor progress in US dollar LIBOR transition. However, they have not indicated that they intend to compel IBA to publish those settings. Indeed, the FCA stated that the decisions to require publication of some sterling and Japanese yen LIBOR settings on a synthetic basis are not determinative of any future decisions in respect of US dollar LIBOR from end-June 2023. Importantly, the FCA is also consulting on its intention to prohibit the use of USD LIBOR in all new contracts except cleared derivatives after end-2021. Other than specified market-making and risk management activities – similar to the exceptions set forth in the U.S. supervisory guidance – the FCA’s intentions as set forth in their consultation aligns with the U.S. supervisory guidance and the stated supervisory expectations of the UK financial regulators.
Responses on the consultation are requested by October 20th.
Click here for the press release.
Click here for the FCA’s consultation on Articles 23C and 21A of BMR
Click here for the draft notice of requirements for the methodology.
Click here for feedback statement FS21/10.
Click for final statements of policy for Article 21A and Article 23C.