FCA Considers Temporary Synthetic Libor Rates

The UK’s Financial Conduct Authority (FCA) has published a proposal for Libor administrator IBA to extend the publication of certain benchmark rates until 2024, using an “unrepresentative synthetic methodology”.

While a majority of products benchmarked to Libor have shifted to risk-free rates (RFRs), a substantial amount remain linked to Libor, however banks are due to stop submitting rates to the benchmark authority at the end of June 2023. Under the FCA’s proposal, IBA will publish the one-, three-, and six-month US dollar Libor settings under a synthetic methodology for a temporary period until end-September 2024.

“While we consider synthetic Libor a fair and reasonable approximation of what Libor might have been, it will no longer be representative for the purposes of the BMR [benchmarks regulation],” the FCA says. “It is not for use in new contracts. It is intended for use in certain legacy contracts only.”

The UK regulator says many US dollar Libor contracts have provisions which trigger their conversion to RFRs when publication on a representative basis, ends after 30 June 2023, but that others, particularly many contracts under US law, are covered by legislative provisions that will enable their conversion to appropriate alternative rates at this point. “Respondents to our consultation highlighted a significant number of contracts in cash markets, in particular cash markets outside the United States, that would benefit from a period of publication of US dollar Libor on a synthetic basis,” it states.

The FCA also says that under its proposal, IBA will publish a synthetic three-month sterling Libor for another year after it was due to be discontinued in March 2023. After March 2024, the FCA says the publication will “cease permanently”.