FCA Names Date for Killing off LIBOR

The UK’s Financial Conduct Authority (FCA) says that 31 December 2021 will see the end of all LIBOR rate settings apart from a few dates in the US dollar market.

All sterling, euro, Swiss franc and Japanese yen settings, as well as the one-week and two-month US dollar settings, will cease at that time, the remaining dollar rate settings will continue until 30 June 2023.

The UK regulator says that based upon undertakings received from the panel banks, it does not expect that any settings will become unrepresentative before the relevant dates, however it stresses that representative LIBOR rates will not be available beyond those dates.

As a result of the announcement, ISDA has announced that the spread adjustments to be used in its IBOR fallbacks have been fixed. “Today’s announcement constitutes an index cessation event under the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol for all 35 LIBOR settings,” the association says in a statement. “As a result, the fallback spread adjustment published by Bloomberg is fixed as of the date of the announcement for all euro, sterling, Swiss franc, US dollar and yen LIBOR settings.”

In its statement, the FCA says it and the Bank of England have made it clear over a number of years that the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it. Accordingly, it adds, both have worked closely with market participants and regulatory authorities around the world to ensure that robust alternatives to LIBOR are available and that existing contracts can be transitioned onto these alternatives to safeguard financial stability and market integrity.

“Market-led working groups and official sector bodies, including the Financial Stability Board, have set out clear timelines to help market participants plan a smooth transition in advance of LIBOR ceasing,” The FCA says. “Today’s announcements confirm the importance of those preparations for all users of LIBOR. Regulated firms should expect further engagement from their supervisors at both the Prudential Regulation Authority and the FCA to ensure these timelines are met.”

Some existing LIBOR contracts are particularly difficult to amend ahead of the LIBOR panels ceasing, and the FCA says it is taking steps to help reduce disruption in these cases, adding it will consult in Q2 on using proposed new powers that the government is legislating to grant to it under the Benchmarks Regulation (BMR) to require continued publication on a ‘synthetic’ basis for some sterling LIBOR settings and, for one additional year, some Japanese yen LIBOR settings. It says it will also continue to consider the case for using these powers for some US dollar LIBOR settings. “Any ‘synthetic’ LIBOR will no longer be representative for the purposes of the BMR and is not for use in new contracts,” it warns, however, adding, “It is intended for use in ‘tough legacy’ contracts only.”

The FCA says it will also consult in Q2 on which legacy contracts will be permitted to use any ‘synthetic’ LIBOR rate. It has also published statements of policy in relation to some of its proposed new BMR powers. These statements of policy confirm its policy approach, explain its plans set out above and its intention to propose using, as a methodology for any ‘synthetic rate’, a forward-looking term rate version of the relevant risk-free rate plus a fixed spread aligned with the spreads in ISDA’s IBOR fallbacks.

“Today’s announcements provide certainty on when the LIBOR panels will end,” says FCA CEO Nikhil Rathi. “Publication of most of the LIBOR benchmarks will cease at the same time as the panels end. Market participants must now complete their transition plans.”

Bank of England Governor Andrew Bailey, adds, “Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system. With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021.”