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    FCA Proposes Policy on New Powers Under Benchmarks Regulation

    November 30, 2020

    FCA is consulting on policy proposals with respect to the new powers that would be granted to FCA under the Benchmarks Regulation, as amended by the Financial Services Bill introduced into the UK Parliament on October 21, 2020. One consultation paper seeks views on designating an unrepresentative benchmark using new powers under the proposed Article 23A to the Benchmarks Regulation. The other consultation paper seeks views on requiring changes to a critical benchmark, including its methodology, using new powers under proposed Article 23D of the Benchmarks Regulation. The consultation period on these policy proposals closes on January 18, 2021, post which FCA expects to publish the finalized approach in the form of Statements of Policy.

    With respect to the consultation on designation of benchmarks under new Article 23A, the Financial Services Bill proposes the insertion of a new Article 23A into the Benchmarks Regulation. Its provisions would grant FCA the ability, in certain circumstances, to designate a critical benchmark as an Article 23A benchmark. Such designation would result in a general prohibition on use of the benchmark by supervised entities as well as powers for FCA to exempt some or all existing use of the benchmark from this general prohibition. It would also empower FCA to impose requirements on the benchmark administrator relating to the way in which the benchmark is determined, including by amending the benchmark’s methodology. In its consultation, FCA outlines the factors it proposes to take into consideration when deciding whether FCA should designate a critical benchmark, such as a currency-tenor (setting) of LIBOR, as an Article 23A benchmark.

    With respect to the consultation on exercise of powers of FCA under new Article 23D, the Financial Services Bill proposes the insertion of a new Article 23D into the Benchmarks Regulation. Its provisions would grant FCA the ability, in certain circumstances, to impose requirements on the administrator of a critical benchmark designated under new Article 23A. A critical benchmark can be designated under new Article 23A where FCA has found that it is no longer representative of the market it is intended to measure, or its representativeness is at risk, and its representativeness will not be restored and maintained. Following such a designation, the requirements FCA could impose on the benchmark administrator are set out in the proposed new Article 23D(2). These relate to the way in which the benchmark is determined, the rules of the benchmark or, where the benchmark is based on submissions from contributors, the benchmark’s code of conduct. This FCA consultation is drafted with a focus on LIBOR. FCA will conduct a further consultation in relation to specific future decisions to exercise the Article 23D power in respect of LIBOR.

    FCA has published these consultations based on the assumption that the Financial Services Bill will be passed in its current form. The exercise of these powers would be subject to a decision by ICE Benchmark Administration (IBA), the FCA-regulated and authorized administrator of LIBOR, to cease publication of LIBOR as the conclusion of its consultation. It would also be subject to the powers that have been proposed in the Financial Services Bill being enacted by the UK Parliament, feedback to policy proposals on how FCA may use its powers, and any subsequent consultations on decisions to use those powers once the policy is finalized. FCA plans to consult, in the second quarter of 2021, on its approach to the exercise of powers under the proposed Article 21A and Article 23C. FCA will conduct a further consultation in 2021 in relation to any decision to exercise the proposed Article 23D power in respect of LIBOR.

     

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    Comment Due Date: January 18, 2021

    Keywords: Europe, UK, Banking, Securities, Benchmarks Regulation, Financial Services Bill, LIBOR, Interest Rate Benchmarks, Benchmark Reforms, Basel, FCA

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