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    FCA Proposes to Require Synthetic LIBOR for SONIA and TONA Settings

    June 24, 2021

    FCA is consulting (in CP21/19) on the decision to require synthetic LIBOR for six sterling and Japanese yen settings. FCA proposes to use its new power, under the Benchmarks Regulation, to require ICE Benchmark Administration (IBA), which is the administrator of London Inter-bank Offered Rate (LIBOR), to change the way one-month, three-month and six-month sterling and Japanese yen LIBOR settings will be determined after 2021 to secure an orderly wind-down. This power was introduced through amendments to the Benchmarks Regulation under the Financial Services Act 2021. The comment period for this consultation will end on August 27, 2021. FCA plans to consult further in the third quarter on a proposed decision on precisely what legacy use to allow for any synthetic sterling and yen LIBOR and to communicate the final decision in the fourth quarter of 2021.

    FCA proposes to use its Article 23D(2) Benchmarks Regulation powers to require a synthetic LIBOR to be calculated using a forward-looking term version of the relevant risk-free rate (SONIA for sterling and TONA for yen) and the fixed ISDA spread adjustment that has been published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol for the respective LIBOR setting. For sterling, two term SONIA reference rates are provided by Refinitiv and IBA. Both term SONIA reference rates are compliant with requirements of the Benchmarks Regulation. FCA selected the term SONIA reference rates provided by IBA as a component for the specific purpose of a potential synthetic sterling LIBOR. As part of the transition away from LIBOR in certain niche parts of the cash market, FCA considers that either of the term SONIA reference rates could be suitable for limited usage as identified by the Working Group on Sterling Risk-Free Reference Rates. FCA welcomes continued publication of both rates.

    For yen, FCA selected the Tokyo Term Risk Free Rate provided by QUICK Benchmarks Inc (QBS) as a component for a potential synthetic yen LIBOR. Tokyo Term Risk Free Rate is recommended by the Japanese Cross-Industry Committee to help transition in the cash market and is the only forward-looking term risk-free rate for yen. FCA expects to designate the six LIBOR settings as Article 23A benchmarks, with this designation taking effect immediately after the end of 2021; these would then be subject to a change of methodology immediately after the end of 2021 via the powers of FCA under Article 23D(2) of the Benchmarks Regulation. FCA expects that the proposal in CP21/19 will be of interest to regulated and unregulated users of LIBOR, the administrator of LIBOR, and providers of component inputs for a potential "synthetic" LIBOR.

    FCA reminds market participants that any synthetic LIBOR will be time limited and is intended as a safety-net only for contracts that cannot transition. FCA encourages market participants to continue active transition away from LIBOR wherever practicable and in line with the relevant industry milestones, and not to delay their plans by waiting for a potential "synthetic"’ solution. The proposed decision in CP21/19 is in line with the FCA policy framework for whether and how it would use the Article 23D(2) powers to ensure an orderly cessation of a critical benchmark. FCA consulted on this policy framework in November 2020 and published it in the final form in March 2021. Where a synthetic LIBOR is implemented, FCA will also need to determine who will be permitted to use it. FCA has consulted separately on its proposed policy for determining this via a consultation that closed on June 17, 2021. FCA is considering responses to that consultation before publishing the final policy framework. 


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    Comment Due Date: August 27, 2021

    Keywords: Europe, UK, Banking, Securities, LIBOR, Interest Rate Benchmarks, Benchmarks Regulation, SONIA, TONA, Benchmark Reforms, Benchmark Administrator, Fallback Protocol, FCA

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