The proposals enhance the FCA’s powers to ensure an orderly wind-down of critical benchmarks and to deal with “tough legacy” contracts that cannot transition from LIBOR.
On 23 June 2020, the FCA published a statement welcoming HM Treasury’s announcement that the Treasury intends to bring forward legislation to amend the onshored UK version of the EU Benchmarks Regulation (UK BMR). Under the proposed changes, the FCA would have enhanced powers to ensure an orderly wind-down of critical benchmarks where the FCA has found that the benchmark’s representativeness will not be restored. These changes will be particularly helpful in the context of the LIBOR transition.
Where particular users are unable to amend “tough legacy” contracts to move away from LIBOR, the FCA would have the power to direct the administrator of LIBOR to change the benchmark’s methodology, if doing so would protect consumers and market integrity. This would allow limited continued use of LIBOR in legacy contracts during a wind-down period. There are some limitations to this approach, however. Such regulatory action to change the LIBOR methodology may not be feasible in all circumstances, for example where the inputs necessary for an alternative methodology are not available in the relevant currency. Further, parties relying on such regulatory action will not have control over the economic terms of that action and, as different approaches and rates will be appropriate for different product classes and users, a single methodology change may not have the desired effect for all markets.
Whilst the proposed changes are helpful, the FCA’s statement encourages market participants to continue focusing on active transition, in order to ensure certainty about contractual continuity and retain control over their contractual terms when LIBOR ceases or is no longer representative, including through the use of market-standard documents such as those produced by the International Swaps and Derivatives Association.
In another statement made on the same day, HM Treasury announced that it would be amending the UK BMR to ensure continued market access to third country benchmarks until end-2025. A policy statement is expected in July 2020. This will be welcome news to users of third country benchmarks who will be required to comply with the UK BMR from 1 January 2021.