FCA consults on winding down ‘synthetic’ sterling LIBOR
The UK Financial Conduct Authority (FCA) is seeking views on winding down the 1, 3 and 6-month synthetic sterling LIBOR settings. The regulator is also seeking information on market participants’ exposure to US dollar LIBOR.
In the fall of 2021, the FCA announced that it would compel the continued publication of the 1-, 3- and 6-month sterling LIBOR settings for a limited time after end-2021, using a ‘synthetic’ methodology. The regulator has been clear that synthetic LIBOR is temporary.
The FCA can compel its continued production for up to one year at a time, for a maximum period of 10 years. Once outstanding contracts that reference a particular LIBOR setting have had time to transition to an alternative benchmark – or to make provision to do so – it may no longer be appropriate for the FCA to require continued publication of that setting. This consultation is intended to help the FCA in its review of its decisions to require continued publication.
For US dollar LIBOR, in due course the FCA will need to assess whether the remaining settings can be wound down in an orderly fashion when the panel ends on 30 June 2023, and if not, whether a synthetic US dollar LIBOR rate might be appropriate for certain contracts that are not within scope of LIBOR-related federal legislation. The regulator wants to understand whether there are any insurmountable barriers to transitioning outstanding US dollar LIBOR contracts before or upon the cessation of the panel, and if so, the size and nature of any exposures that market participants expect may remain at that point.
On 31 December 2021, publication of 24 LIBOR settings ended. For the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings, the FCA required the administrator of LIBOR to continue publication on a synthetic (and unrepresentative) basis from end-2021. This was to give the holders of certain legacy contracts more time to complete transition.
Five US dollar LIBOR settings will continue to be calculated using panel bank submissions until end-June 2023, when the US dollar LIBOR panel will end.
The FCA is seeking responses to this consultation by 24 August 2022.