By Becky Critchley and Anna Lewis-Martinez
On 5 March 2021, the UK’s Financial Conduct Authority (FCA) formally announced the dates for the cessation of all London Interbank Offered Rate (LIBOR) benchmark settings currently published by ICE Benchmark Administration (IBA). The FCA also confirmed that where a “synthetic” LIBOR is available after the cessation dates, the synthetic LIBOR will not in any event be considered to be representative as of the cessation dates. This is an important step towards the end of LIBOR, providing market participants with a fixed timeline for LIBOR’s cessation. The announcement also adds pressure on market participants to complete their transition plans by the end of 2021.
The FCA’s announcement follows the IBA’s notification to the FCA — following its consultation and notices of future departure received from the majority of the panel banks for each LIBOR setting — that it intends to cease providing all LIBOR settings for all currencies, subject to any rights of the FCA to compel IBA to continue publication.
The International Swaps and Derivatives Association (ISDA) confirmed that the FCA’s announcement will serve as a trigger event for the application of fallbacks under its IBOR Fallbacks Supplement and Protocol.
The FCA confirmed that publication of 26 LIBOR settings will cease immediately after:
- 31 December 2021 for all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings
- 30 June 2023 for the overnight and 12-month US dollar LIBOR settings
The FCA does not expect that any LIBOR settings will become unrepresentative before the specified dates. However, representative LIBOR rates will not be available beyond the confirmed cessation dates. Publication of most of the LIBOR settings will cease immediately after these dates.
In addition, for the remaining nine LIBOR settings the FCA has announced that it will:
- Consult on whether the three remaining sterling LIBOR settings (1-month, 3-month, and 6-month) should continue to be published for a further period after 31 December 2021 on a synthetic basis, using the FCA’s proposed new powers that the UK government is legislating to grant it under the UK Benchmarks Regulation (UK BMR)
- Consult on whether the Japanese yen LIBOR settings (1-month, 3-month, and 6-month) should continue to be published after 31 December 2021 on a synthetic basis, until 31 December 2022, when these settings would permanently cease
- Continue to consider the case, as the transition away from US dollar LIBOR progresses, to require continued publication on a synthetic basis of the US dollar LIBOR settings (1-month, 3-month, and 6-month) for a further period after 30 June 2023
The FCA is due to consult later in 2021 on its proposed new powers that the UK government is legislating to grant it under the UK BMR to require IBA to continue publishing the LIBOR settings mentioned above on a synthetic basis.
However, the extended publication of certain LIBOR settings on a synthetic basis will only provide relief for certain types of tough legacy contracts (contracts that are particularly difficult to renegotiate or amend or where there is no suitable alternative), and must not be used in new contracts. As such, the FCA’s proposed new powers are likely to be of limited use to the wider market. The FCA is expected to consult in the second half of 2021 on which categories of tough legacy contracts will be permitted to use any synthetic LIBOR rate.
ISDA confirmed that the FCA’s announcement of 5 March 2021 “constitutes an index cessation event under the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol for all 35 LIBOR settings. As a result, the fallback spread adjustment published by Bloomberg is fixed as of the date of the announcement for all euro, sterling, Swiss franc, US dollar and yen LIBOR settings”, providing more clarity for holders of legacy derivatives contracts.
ISDA also issued additional guidance on the FCA announcement.
FCA’s Proposed New Powers Under the UK BMR
The FCA has published statements of policy in relation to some of its proposed new powers under the UK BMR. These statements of policy confirm the FCA’s policy approach, explain the FCA’s plans and intention to propose using, as a methodology for any synthetic rate, a forward-looking term rate version of the relevant risk-free rate plus a fixed spread aligned with the spreads in ISDA’s IBOR fallbacks.
Firms must act now. The announcements by the FCA and ISDA mark the end of LIBOR and confirm the importance of preparations for all users transitioning away from LIBOR. Regulated firms should expect further engagement from their supervisors at the PRA and the FCA to help them meet the specified deadlines.
Nikhil Rathi, CEO of the FCA, emphasised that the announcements “provide certainty on when the LIBOR panels will end … Market participants must now complete their transition plans”.
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