Final LIBOR wind-down begins
05 March 2021 UK
Image: FCA logo
The UK financial regulator has confirmed that the London Interbank Offered Rate (LIBOR) will be almost completely phased out by the end of the year.
The Financial Conduct Authority (FCA) has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, along with one-week and two-month US dollar settings.
In the case of the remaining US dollar settings the deadline is 30 June 2023.
Based on undertakings received from the panel banks, the FCA does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out.
The Bank of England and the FCA are urging market participants to take the necessary action to ensure they are ready.
As the International Swaps and Derivatives Association has confirmed separately, the spread adjustments to be used in its IBOR fallbacks will be fixed as a result of the FCA’s announcement.
According to ISDA, this will provide clarity on the future terms of the many derivative contracts which now incorporate these fallbacks.
In January, the FCA confirmed that 85 per cent of the uncleared UK derivatives market was ready for the end of the LIBOR as 12,500 firms signed ISDA’s protocol.
Over the years, the Bank of England and the FCA have explained the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it.
Both have worked 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.
Authorities have also recognised that there are some existing LIBOR contracts which are particularly difficult to amend ahead of the LIBOR panels ceasing, often known as the ‘tough legacy’.
The FCA says it is taking steps to help reduce disruption in these cases and 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.
Additionally, it will 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.
The FCA notes that this is intended for use in tough legacy contracts only. The FCA will also consult in Q2 on which legacy contracts will be permitted to use any ‘synthetic’ LIBOR rate.
The FCA has also published statements of policy in relation to some of these proposed new BMR powers confirming its policy approach.
It also explains 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.
FCA CEO Nikhil Rathi comments: “The announcements provide certainty on when the LIBOR panels will end. 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.”
Andrew Bailey, governor of the Bank of England, adds: “The 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.”
The Financial Conduct Authority (FCA) has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, along with one-week and two-month US dollar settings.
In the case of the remaining US dollar settings the deadline is 30 June 2023.
Based on undertakings received from the panel banks, the FCA does not expect that any LIBOR settings will become unrepresentative before the relevant dates set out.
The Bank of England and the FCA are urging market participants to take the necessary action to ensure they are ready.
As the International Swaps and Derivatives Association has confirmed separately, the spread adjustments to be used in its IBOR fallbacks will be fixed as a result of the FCA’s announcement.
According to ISDA, this will provide clarity on the future terms of the many derivative contracts which now incorporate these fallbacks.
In January, the FCA confirmed that 85 per cent of the uncleared UK derivatives market was ready for the end of the LIBOR as 12,500 firms signed ISDA’s protocol.
Over the years, the Bank of England and the FCA have explained the lack of an active underlying market makes LIBOR unsustainable, and unsuitable for the widespread reliance that had been placed upon it.
Both have worked 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.
Authorities have also recognised that there are some existing LIBOR contracts which are particularly difficult to amend ahead of the LIBOR panels ceasing, often known as the ‘tough legacy’.
The FCA says it is taking steps to help reduce disruption in these cases and 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.
Additionally, it will 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.
The FCA notes that this is intended for use in tough legacy contracts only. The FCA will also consult in Q2 on which legacy contracts will be permitted to use any ‘synthetic’ LIBOR rate.
The FCA has also published statements of policy in relation to some of these proposed new BMR powers confirming its policy approach.
It also explains 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.
FCA CEO Nikhil Rathi comments: “The announcements provide certainty on when the LIBOR panels will end. 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.”
Andrew Bailey, governor of the Bank of England, adds: “The 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.”
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