FCA: Further Consultation on LIBOR Wind-Down11.24.2022
We are proposing to require LIBOR’s administrator, IBA, to continue to publish the 1-, 3- and 6-month US dollar LIBOR settings under an unrepresentative ‘synthetic’ methodology until end-September 2024. After this, publication would cease permanently. For sterling LIBOR, we intend to continue to require IBA to publish the 3-month synthetic sterling LIBOR setting until end-March 2024, after which it will cease permanently.
The effect of these announcements and proposals is that the final LIBOR publication would be end-September 2024:
- the 3 synthetic yen LIBOR settings will cease at end-2022
- the 1- and 6-month synthetic sterling LIBOR settings will cease at end-March 2023
- the overnight and 12-month US dollar LIBOR settings will cease at end-June 2023
- the 3-month synthetic sterling LIBOR setting will cease at end-March 2024
- the 1-, 3- and 6-month synthetic US dollar LIBOR settings would cease at end-September 2024 (proposed)
US dollar LIBOR
We previously announced that US dollar LIBOR will cease to be produced on a representative, panel-bank basis, immediately after it is published on 30 June 2023. We noted in our announcements that we would consider the case for using powers under the Benchmarks Regulation (BMR) to require continued publication on a ‘synthetic’ basis for certain US dollar LIBOR settings.
In light of the feedback received to our June consultation, we have published a further consultation on our proposals to use those powers to require LIBOR’s administrator, ICE Benchmark Administration Limited (IBA), to publish the 1-, 3-, and 6-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. It is not for use in new contracts. It is intended for use in certain legacy contracts only.
Many US dollar LIBOR contracts have provisions which trigger their conversion to alternative rates (eg risk-free rates) when publication on a representative basis ends after 30 June 2023. Others, particularly many contracts under US law, are covered by legislative provisions that will enable their conversion to appropriate alternative rates at this point. But 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.
Our consultation also seeks views on our proposals to:
- Use CME Term SOFR plus the relevant ISDA fixed spread adjustment as the methodology for a synthetic US dollar LIBOR.
- Permit all legacy contracts other than cleared derivatives to use a synthetic US dollar LIBOR.
This consultation will remain open until 6 January 2023 and we expect to announce our final decision in late Q1/early Q2 2023.
Any synthetic LIBOR settings are only a bridge to appropriate alternative risk-free rates, not a permanent solution. As such, market participants should continue to prioritise active transition and focus on converting their legacy contracts to risk-free rates as soon as possible.
For the overnight and 12-month US dollar LIBOR settings, we remind market participants to be prepared for publication to cease permanently at end-June 2023.
In line with the feedback received to our June consultation, on 29 September 2022 we announced that we will require LIBOR’s administrator, IBA, to continue to publish the 1- and 6-month synthetic sterling LIBOR settings for a further 3 months until end-March 2023, after which they will cease permanently.
A significant number of respondents argued for giving advance notice that the 3-month synthetic sterling LIBOR setting would end after a limited period of continued publication beyond end-March 2023.
In line with this feedback, we intend to continue to require IBA to publish the 3-month synthetic sterling LIBOR setting until end-March 2024, after which it will cease permanently. Those market participants who still have contracts referencing 3-month sterling LIBOR should ensure they are prepared for publication to cease at that time.
For synthetic yen LIBOR, we continue to remind market participants to be prepared for publication to cease permanently at end-2022.
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