FCA Issues Updates on LIBOR Transition and Enhanced SM&CR Status

When introducing the IFPR in January 2022, FCA renamed and moved the definition of “Significant IFPRU firm” used as one of the criteria for identifying enhanced firms under the SM&CR. The intention was to retain the definition in its rules following deletion of the IFPRU sourcebook. A number of stakeholders have since highlighted that this new definition of “Significant SYSC firm” could result in more firms being brought into the enhanced scope than under the previous definition, as it had been understood and applied. FCA plans to consult shortly to make changes necessary to clarify that only firms that would have been both Significant IFPRU firms and IFPRU investment firms under the pre-IFPR arrangements fall within the new definition of “Significant SYSC firm” for purpose of the enhanced scope SM&CR regime. FCA also clarified that firms that have unintentionally come under the Enhanced Scope SM&CR Regime under the new version of Significant SYSC need take no action.

Coming back to the statement on LIBOR transition, many legacy LIBOR-linked bonds (including securitizations and other similar structures) have now been converted by mutual agreement of issuer and bondholders to risk-free rates through processes such as consent solicitation. FCA strongly encourages issuers of the remaining LIBOR-linked bonds (or those that may have a future LIBOR-linked dependency) issued under English or other non-US laws that make consent solicitation practicable, to schedule consent solicitation processes for conversion to fair alternative rates. The relevant risk-free rate plus the industry-agreed spreads that have been used in successful consent solicitation exercises to date provide a model for such conversions. In this recent statement, FCA reiterates that the responsibility for initiating this process lies with the bond issuer. FCA also encourages holders of bonds without robust fallbacks or another mechanism to remove reliance on LIBOR, to engage with the relevant issuer(s) or their agent(s), and requests that these bondholders initiate the conversion processes.

In the statement on LIBOR, FCA notes that some issuers and bondholders have benefitted from the temporary continued publication of the one-, three- and six-month sterling and yen LIBOR settings using a "synthetic" methodology. FCA required the publication of these synthetic LIBOR rates to avoid a cliff edge at the end of 2021. This has given issuers more time to arrange transition to more robust alternative rates. However, the publication of synthetic yen LIBOR will cease at the end of 2022 while the USD LIBOR panel ends at the end of June 2023. While bonds issued under the U.S. law may benefit from U.S. legislation to convert these to risk-free rates at the end of June 2023, there are also significant number of USD LIBOR bonds issued under the English (and other non-US) law. These will not benefit from the U.S. legislation. However, conversion through processes such as consent solicitation is usually practicable under the standard terms of bonds written under non-U.S. law in a way that may not be the case for those written under the U.S. law. Furthermore, FCA had earlier said that it would consider whether it is desirable to use its powers to require continued publication on a temporary and synthetic basis of the one-, three- and six-month USD LIBOR settings after end-June 2023. It is currently seeking views (via CP22/11) on market participants’ outstanding USD LIBOR exposure to inform this assessment in due course. Given the global use of USD LIBOR, FCA is keen to hear the views of impacted stakeholders beyond as well as within the UK. However, market participants should not rely on such a publication because, if FCA does require publication of any synthetic USD LIBOR rates, this will be for a temporary period only. For longer-maturity bonds, conversion through consent, solicitation, or other arrangements will be necessary.

Related Links

• Statement on LIBOR Transition
• Statement on Enhanced SM&CR Status

Keywords: Europe, UK, Banking, Securities, Libor, Libor Transition, SM&CR, IFPR, Investment Firms, Basel, Lending, Operational Risk, FCA