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    FCA Proposes to Use New Powers to Support Critical Benchmark Wind Down

    May 20, 2021

    FCA published a consultation on the proposed policy framework for exercising two of its new powers under the Benchmarks Regulation, which will be introduced by the Financial Services Act 2021. These powers relate to the use of critical benchmarks that are being wound down. The consultation is another important step in the wind down of LIBOR. The comment period for this consultation ends on June 17, 2021, with FCA planning to publish a statement of policy and feedback statement in the third quarter of 2021.

    This consultation sets out which factors the FCA thinks are relevant in deciding what legacy use of a permanently non-representative benchmark, such as any synthetic LIBOR, it will permit to continue. FCA reminds market participants that any permitted use of synthetic LIBOR would not be a permanent solution, so parties will need to continue their efforts to amend their contracts. The consultation also sets out the proposed approach of FCA to using its power to prohibit new use of a critical benchmark that is ending. This power is separate to the legacy use power and will be particularly relevant to USD LIBOR, given most settings will continue in their current form until mid-2023. FCA has been already clear that it supports the U.S. authorities’ approach of stopping new use of USD LIBOR by the end of this year. FCA will finalize its policies in light of the feedback received. It will then aim to consult in the third quarter on its proposed decisions on precisely what legacy use to allow for any synthetic sterling and yen LIBOR, and how it might restrict new use of LIBOR rates, including USD LIBOR. FCA intends to confirm its final decisions as soon as practicable in the fourth quarter of 2021. This two-stage consultation process is intended to give market participants the opportunity to engage on these important issues.

    The consultation is another important step in the wind down of LIBOR. The consultation will interest users of critical benchmarks such as LIBOR, whether those users are regulated or unregulated. This includes banks and building societies, investment managers, life insurance and pension providers, mortgage lenders and intermediaries, corporates of all sizes, and consumers who have mortgages or other consumer loans that use critical benchmarks. It will also interest administrators of critical benchmarks.

     

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    Comment Due Date: June 17, 2021

    Keywords: Europe, UK, Banking, Insurance, Securities, Pensions, Benchmarks Regulation, Legacy Contracts, LIBOR, Interest Rate Benchmarks, Benchmark Reforms, FCA

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