The UK Financial Conduct Authority (FCA) published a consultation on its proposed decision to use one of its powers under the Benchmarks Regulation (BMR) that will be introduced by the Financial Services Act 2021.

This power will enable the regulator to require the LIBOR administrator, IBA, to change the benchmark’s methodology. The consultation is a key step in ensuring an orderly wind down of LIBOR.

Let’s recall that, in March 2021, the FCA confirmed the dates the LIBOR panels will end. This includes the cessation of all sterling and Japanese yen LIBOR panels immediately after end-2021.

The FCA said it would consult on using its new powers under the BMR to require the more widely used 1-month, 3-month and 6-month sterling and Japanese yen LIBOR settings to be determined under a changed methodology (ie on a ‘synthetic’ basis) after end-2021. For the 3 Japanese yen LIBOR settings, based on information currently available to the FCA, the regulator plans to compel their publication for 1 year only until end-2022, after which they will cease.

The regulator proposes to use its Article 23D(2) BMR powers to require a synthetic LIBOR to be calculated using a forward-looking term version of the relevant risk-free rate (ie SONIA for sterling and TONA for yen) and the fixed ISDA spread adjustment published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol for the respective LIBOR setting.

For sterling, there are 2 term SONIA reference rates (TSRRs) provided by Refinitiv and IBA. Both TSRRs are compliant with BMR requirements. The FCA has selected the TSRR provided by IBA as a component for the specific purpose of a potential synthetic sterling LIBOR. More generally as part of the transition away from LIBOR in certain niche parts of the cash market, the FCA considers that either TSRR could be suitable for limited usage as identified by the Working Group on Sterling Risk-Free Reference Rates. The regulator welcomes continued publication of both rates.

For yen, the FCA has selected the Tokyo Term Risk Free Rate (TORF) provided by QUICK Benchmarks Inc (QBS) as a component for a potential synthetic yen LIBOR. TORF is recommended by the Japanese Cross-Industry Committee to help transition in the cash market and is the only forward-looking term RFR for yen.

This consultation is open for 9 weeks. The FCA intends to confirm its final decisions as soon as practicable in Q4.