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    FCA Publishes Rules for Legacy Use of Synthetic LIBOR Rates

    November 16, 2021

    The Financial Conduct Authority (FCA) announced that it has assessed completeness, and now reached the examination stage in the assessment process, of applications received from securitization repositories under the UK Securitization Regulation. The obligation to report public securitizations within the scope of the UK Securitization Regulation to a securitization repository that is registered and supervised by FCA will apply as soon as one securitization repository is registered. Additionally, FCA confirmed that it will allow the temporary use of synthetic sterling and JPY LIBOR rates in all legacy LIBOR contracts, other than cleared derivatives, that have not been changed at or ahead of end-December 31, 2021. These synthetic rates will not be available for use in any new contracts.

    At present, LIBOR is based on submissions provided by a panel of banks and these submissions are mostly based on estimates intended to reflect the interest rate at which banks could borrow money on unsecured terms in wholesale markets. Many contracts that use LIBOR have already been switched to new risk-free overnight interest rate benchmarks or will do so at the end of 2021. However, there is a risk of disruption to markets and consumers if interest payments in LIBOR loans, mortgages, bonds, and other contracts that have not switched by the end of 2021 cannot be calculated. Thus, FCA is requiring the publication of one-, three-, and six-month LIBOR rates for sterling and JPY on a synthetic basis until the end of 2022, to allow more time to complete transition.

    FCA also published a statement (FS21/11) that sets out feedback on responses to its proposal to use new powers introduced through amendments to the Benchmarks Regulation under the Financial Services Act 2021. In June 2021, FCA published a consultation on its decision to use its new power under the Benchmarks Regulation for one-, three-, and six-month sterling and JPY LIBOR settings (six LIBOR settings). FCA proposed to require ICE Benchmark Administration (IBA), which is the administrator of LIBOR, to publish these LIBOR settings under a changed, synthetic methodology for a limited period beyond the end of 2021 for use in legacy contracts. A large majority of respondents supported the proposed approach. FCA has published a draft version of the Notice on Article 23D of Benchmarks Regulation. Although the five USD LIBOR settings will continue to be calculated by panel bank submission until end-June 2023, FCA also confirmed that the use of USD LIBOR will not be allowed in most new contracts written after December 31, 2021. The move to end the use of USD LIBOR in new contracts is supported by regulators in the U.S. and around the world. FCA has provided a clarification to help firms implement this restriction. A final form of the Notice, as required by Article 23D(2), will be given to IBA on January 01, 2022. The Notice will take immediate effect after it is given to IBA and after the Article 23A(4) Notice on designations takes effect at January 01, 2022.

     

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    Keywords: Europe, UK, Banking, Securities, Securitization Regulation, Legacy Contracts, IBOR, LIBOR, Benchmark Reforms, Benchmark Regulation, Synthetic LIBOR, Securitization Repositories, FCA

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