Further arrangements for the orderly wind-down of LIBOR at end-2021

Thanks to Simon Lovegrove, Global Director of Financial Services Knowledge, Innovation and Product at Norton Rose Fulbright for this article.

On 29 September 2021, the FCA issued a statement on its website stating that sterling, Japanese yen, Swiss franc and euro LIBOR panels are ceasing on 31 December 2021. The FCA also confirms that to avoid disruption to legacy contracts that reference the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings, it will require the LIBOR benchmark administrator to publish these settings under a ‘synthetic’ methodology, based on term risk-free rates, for the duration of 2022. These 6 LIBOR settings will be available only for use in some legacy contracts, and are not for use in new business.

The FCA has also published Consultation Paper 21/29: Proposed decisions on the use of LIBOR (Articles 23C and 21A BMR) (CP21/29).

Article 23A of the onshored Benchmarks Regulation (BMR) grants the FCA the ability, in certain circumstances, to designate a critical benchmark as an Article 23A benchmark. This designation will result in a prohibition on supervised entities using the benchmark, under Article 23B(1) of the BMR. However, Article 23C(2) gives the FCA the power to permit some or all legacy (ie existing) use of the benchmark to continue. The FCA calls this the ‘legacy use power’.

Article 21A of the BMR gives the FCA the ability to prohibit some or all new use of a critical benchmark when the FCA has been notified by its administrator that it will cease to be provided. The FCA calls this the ‘new use restriction power’.

Earlier this year the FCA published a consultation (Consultation Paper 21/15: Benchmarks Regulation: how we propose to use our powers over use of critical benchmarks) on proposed policies on the exercise of these two new powers. That consultation has now closed and the FCA has published a Feedback Statement and final Statements of Policy on the FCA’s power under Article 21A BMR and Article 23C BMR. In CP21/29 the FCA is now seeking views on its proposed decision to use these powers in respect of certain LIBOR settings.

In CP21/29 the FCA sets out proposals on whether and how to permit legacy use of 1m, 3m and 6m sterling and 1m, 3m and 6m yen LIBOR from 1 January 2022. The FCA proposes to permit legacy use of these 6 LIBOR settings in all contracts except cleared derivatives (whether directly or indirectly cleared). Chapter 3 of CP21/29 sets out how the FCA has had regard to its Article 23C Statement of Policy.

The FCA also sets out in CP21/29 proposals on whether and how to prohibit new use of overnight 1m, 3m, 6m and 12m US dollar LIBOR. The FCA proposes new use of these 5 US dollar LIBOR settings from end-2021 except:

• Market making in support of client activity related to US dollar LIBOR transactions executed before 1 January 2022.

• In transactions that reduce or hedge a supervised entity’s or any client of the supervised entity’s US dollar LIBOR exposure on contracts entered into before 1 January 2022.

• Novations of US dollar LIBOR transactions executed before 1 January 2022.

• Transactions executed for the purposes of participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting US dollar LIBOR exposure.

• For the purpose of interpolation within contractual fallback arrangements for the ceasing US dollar settings (1 week and 2 month)

Chapter 4 of CP21/29 sets out how the FCA has had regard to its Article 21A Statement of Policy.

Paragraphs 1.23 to 1.29 set out what firms need to do.

The deadline for responding to CP21/29 is 20 October 2021.