The Financial Conduct Authority (FCA) announced further arrangements for orderly wind-down of the London Inter-Bank Offered Rate (LIBOR) by the end of 2021. In specific, the sterling, Japanese yen, Swiss franc, and euro LIBOR panels are ceasing on December 31, 2021. FCA is confirming that to avoid disruption to legacy contracts that reference the one-, three-, and six-month sterling and JPY LIBOR settings. This will require the LIBOR benchmark administrator to publish these settings under a "synthetic" methodology, based on term risk-free rates, for the duration of 2022. These six LIBOR settings will be available only for use in some legacy contracts and not for use in new business. FCA also published a consultation paper (CP21/29) on the its proposed decision on which legacy contracts can use these synthetic LIBOR rates. The comment period for this consultation ends on October 20, 2021.
The ICE Benchmark Administration publishes 35 LIBOR settings covering sterling, US dollar, Japanese yen, Swiss franc, and euro. As set out in the FCA’s March 05 announcement, publication of 24 of these settings will cease at the end of 2021. FCA published notices confirming its decisions to compel the continued publication of the remaining six sterling and Japanese yen LIBOR settings for a limited time period after the end of 2021, using a "synthetic" methodology. This is to help ensure an orderly wind-down. The synthetic rate has been chosen by FCA to provide a reasonable and fair approximation of what panel bank LIBOR might have been in the future. The synthetic rates will no longer, however, be representative as defined in the Benchmarks Regulation (BMR). FCA has confirmed the methodology it will require LIBOR’s administrator to use for calculating these "synthetic" rates, following its consultation proposals, as:
- forward-looking term versions of the relevant risk-free rate (that is, the ICE Term SONIA Reference Rates provided by ICE Benchmark Administration for sterling and the Tokyo Term Risk Free Rates (TORF) provided by QUICK Benchmarks Inc, adjusted to be on a 360-day count basis, for Japanese yen), plus
- the respective ISDA fixed spread adjustment (that is published for the purpose of ISDA’s IBOR Fallbacks for the six LIBOR settings)
These six LIBOR settings will become permanently unrepresentative of their underlying markets from January 01 2022. The first non-representative publication under their "synthetic" methodology will be on January 04, 2022. FCA will decide and specify before year-end which legacy contracts are permitted to use these synthetic LIBOR rates. FCA will confirm its final decision on permitted legacy use as soon as practicable after the consultation closes. The decisions to require publication of some sterling and Japanese yen LIBOR settings on a synthetic basis are not determinative of any future decisions in respect of US dollar LIBOR from the end of June 2023.
Comment Due Date: October 20, 2021
Keywords: Europe, UK, Banking, LIBOR, Benchmark Reforms, Legacy Contracts, IBOR, Synthetic Methodology, FCA
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