FCA welcomed the announcement that the UK government intends to bring forward legislation to amend the Benchmarks Regulation (BMR) to give FCA enhanced powers. The legislation will ensure that, by the end of 2021, FCA has the appropriate regulatory powers to manage and direct any wind-down period prior to the eventual LIBOR cessation in a way that protects consumers and ensures market integrity. This could help deal with the problem, as identified by the Sterling Risk Free Rate Working Group, of “tough legacy” contracts that cannot transition from LIBOR. The proposed new powers will be available where FCA has found that a critical benchmark is not representative of the market it seeks to measure and the "representativeness" will not be restored.
As mentioned in the written statement by Rishi Sunak, the Chancellor of the Exchequer, the government intends to amend and strengthen the existing regulatory framework, rather than directly to impose legal changes on LIBOR-referencing contracts that are governed by UK law. The government intends to:
- Amend the UK’s existing regulatory framework for benchmarks to ensure it can be used to manage different scenarios prior to a critical benchmark’s eventual cessation. The government will introduce amendments to the Benchmarks Regulation 2016/1011 as amended by the Benchmarks (Amendment) (EU Exit) Regulations 2018 (UK BMR), to ensure that the powers of FCA are sufficient to manage an orderly transition from LIBOR.
- Extend the circumstances in which FCA may require an administrator to change the methodology of a critical benchmark and clarify the purpose for which the FCA may exercise this power. New regulatory powers would enable FCA to direct a methodology change for a critical benchmark, in circumstances where the regulator has found that the benchmark’s representativeness will not be restored and where action is necessary to protect consumers and/or to ensure market integrity.
- Strengthen the existing law to prohibit use of an individual critical benchmark where its representativeness will not be restored, while giving the regulator the ability to specify limited continued use in legacy contracts.
- Refine ancillary areas of the UK’s regulatory framework for benchmarks to ensure its effectiveness in managing the orderly wind down of a critical benchmark, including that administrators have adequate plans in place for such situations.
Additionally, it has been highlighted that continued focus on transition remains both necessary and desirable for those who can remove their current reliance on LIBOR. The proposed new powers are intended to provide a potential way of resolving recognized issues around legacy LIBOR contracts. The use of these powers might not be possible in all circumstances or for all LIBOR currencies, for example, where the inputs necessary for an alternative methodology are not available in the relevant currency. Even if feasible, parties who rely on regulatory action enabled by the legislation will not have control over the economic terms of that action. FCA and other authorities have been clear that those who can amend their contracts so that they move away from LIBOR at or before this point, should do so. The legislation would empower FCA to protect those who cannot amend their contracts in this way by directing the administrator of LIBOR to change the methodology used to compile the benchmark.
FCA will publish statements of policy on its approach to potential use of these powers following further engagement with stakeholders in the UK and internationally. FCA will seek stakeholder views on possible methodology changes that are based on those risk-free rates. It will also seek views on the consensus already established in international and UK markets on a way of calculating an additional fixed credit spread that reflects the expected difference between LIBOR and risk-free interest rates. The government intends to take the measures forward in the forthcoming Financial Services Bill. The government, FCA, and BoE will continue to work closely to encourage market-led transition from LIBOR and to monitor progress.
Keywords: Europe, UK, Banking, Securities, Benchmarks Regulation, Financial Services Bill, LIBOR, Risk-Free Rates, Benchmark Reforms, Interest Rate Benchmarks, HM Treasury, FCA
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