FCA issued a letter to ISDA in response to an ISDA letter to FSB. In this letter, ISDA had asked whether FCA and ICE Benchmark Administration (IBA) can give further clarity about the length of any “reasonable period” in which a non-representative LIBOR might be published prior to the final cessation of LIBOR. The FCA letter sets out its response to describe the laws relevant in this situation and provides clarity on how FCA intends to apply these laws. IBA also responded to the ISDA letter and has announced a rulebook consultation process regarding the inclusion of an automatic trigger.
The FCA letter sets out why market participants should not assume that any period of non-representative LIBOR based on reduced panel bank submissions would last for more than a short period. The law governing critical benchmarks such as LIBOR is set out in the EU Benchmarks Regulation. Notwithstanding the preference for an orderly cessation, planned in advance, the mechanics of the Benchmarks Regulation mean that the publication of a non-representative LIBOR cannot be ruled out, at least for a period of time. EU-supervised firms could potentially be prohibited from entering into new LIBOR transactions, and even from continuing to use LIBOR in existing transactions in some circumstances, under the Benchmarks Regulation.
FCA has made clear that it sees no way of changing LIBOR to make it representative again after the panel bank departures have rendered it non-representative. Consequently, the only way FCA sees this provision operating in practice is that the administrator must cease the rate within a reasonable time period. Moreover, a non-representative panel bank LIBOR could continue only for such time as a minimum number of panel banks were prepared to continue contributing to the benchmark such that IBA’s Reduced Submissions Policy did not apply. FCA has made clear that it has no plans to compel panel banks to contribute once the existing voluntary agreement with them expires. Consistent with having no plans to compel panel banks to contribute after 2021, assuming insufficient willing voluntary contributors, FCA would not expect to compel IBA to continue to produce a non-representative panel bank LIBOR.
FCA would not seek to prolong a non-representative panel bank LIBOR simply to benefit firms which had failed, or continued to fail, to act on opportunities to transition. Where contracts can practicably be amended to reference alternative rates by bilateral agreement or other arrangements, they should be, before end-2021. EU supervised firms are required by the Benchmarks Regulation to have appropriate plans in the event that a benchmark materially changes or ceases to be provided. Firms can meet this requirement by having pre-cessation triggers included in LIBOR contracts that cannot be proactively transitioned away from the rate. FCA recognizes that there are some LIBOR-referencing contracts that it is not practicable to change and a task force under the Sterling Risk Free Rate Working Group has been dedicated to the topic of "tough legacy."
Keywords: International, Europe, UK, Banking, Securities, LIBOR, IBOR, Pre-Cessation Triggers, Interest Rate Benchmarks, Derivatives, Benchmarks Regulation, FSB, FCA, ISDA
Previous ArticleECB Welcomes Ratification of Agreement on Orderly Brexit
APRA updated the lists of the Direct to APRA (D2A) validation and derivation rules for authorized deposit-taking institutions, insurers, and superannuation entities.
EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience.
ECB published an opinion (CON/2020/22) on proposals for regulations amending the securitization framework of EU, in response to the COVID-19 pandemic.
FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.
MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.
FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.
ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021.
APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.