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    FCA Response to ISDA on Reasonable Period for Non-Representative LIBOR

    January 30, 2020

    FCA issued a letter to ISDA in response to an ISDA letter to FSB. In this letter, ISDA had asked whether FCA and ICE Benchmark Administration (IBA) can give further clarity about the length of any “reasonable period” in which a non-representative LIBOR might be published prior to the final cessation of LIBOR. The FCA letter sets out its response to describe the laws relevant in this situation and provides clarity on how FCA intends to apply these laws. IBA also responded to the ISDA letter and has announced a rulebook consultation process regarding the inclusion of an automatic trigger.

    The FCA letter sets out why market participants should not assume that any period of non-representative LIBOR based on reduced panel bank submissions would last for more than a short period. The law governing critical benchmarks such as LIBOR is set out in the EU Benchmarks Regulation. Notwithstanding the preference for an orderly cessation, planned in advance, the mechanics of the Benchmarks Regulation mean that the publication of a non-representative LIBOR cannot be ruled out, at least for a period of time. EU-supervised firms could potentially be prohibited from entering into new LIBOR transactions, and even from continuing to use LIBOR in existing transactions in some circumstances, under the Benchmarks Regulation.

    FCA has made clear that it sees no way of changing LIBOR to make it representative again after the panel bank departures have rendered it non-representative. Consequently, the only way FCA sees this provision operating in practice is that the administrator must cease the rate within a reasonable time period. Moreover, a non-representative panel bank LIBOR could continue only for such time as a minimum number of panel banks were prepared to continue contributing to the benchmark such that IBA’s Reduced Submissions Policy did not apply. FCA has made clear that it has no plans to compel panel banks to contribute once the existing voluntary agreement with them expires. Consistent with having no plans to compel panel banks to contribute after 2021, assuming insufficient willing voluntary contributors, FCA would not expect to compel IBA to continue to produce a non-representative panel bank LIBOR. 

    FCA would not seek to prolong a non-representative panel bank LIBOR simply to benefit firms which had failed, or continued to fail, to act on opportunities to transition. Where contracts can practicably be amended to reference alternative rates by bilateral agreement or other arrangements, they should be, before end-2021. EU supervised firms are required by the Benchmarks Regulation to have appropriate plans in the event that a benchmark materially changes or ceases to be provided. Firms can meet this requirement by having pre-cessation triggers included in LIBOR contracts that cannot be proactively transitioned away from the rate. FCA recognizes that there are some LIBOR-referencing contracts that it is not practicable to change and a task force under the Sterling Risk Free Rate Working Group has been dedicated to the topic of "tough legacy."


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    Keywords: International, Europe, UK, Banking, Securities, LIBOR, IBOR, Pre-Cessation Triggers, Interest Rate Benchmarks, Derivatives, Benchmarks Regulation, FSB, FCA, ISDA

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