On 16 November 2021, the FCA issued a new webpage confirming that it will allow the temporary use of ‘synthetic’ sterling and yen LIBOR rates in all legacy LIBOR contracts, other than cleared derivatives, that have not been changed at or ahead of end-31 December 2021.
On the webpage the FCA has also issued ‘Article 23C Benchmarks Regulation – Draft notice of permitted legacy use by supervised’ (the Notice).
The FCA notes that many contracts that use LIBOR have already been switched to new risk-free overnight interest rate benchmarks or will do so at end-2021. However, it also acknowledges that there is a risk of disruption to markets if interest payments in LIBOR loans, mortgages, bonds and other contracts that have not switched by end-2021, cannot be calculated. In light of this, the FCA is requiring the publication of 1-, 3-, and 6-month LIBOR rates for sterling and Japanese yen on a synthetic basis until the end of 2022, to allow more time to complete transition.
The FCA has also published Feedback Statement 21/11: Article 23D BMR decision for 6 sterling and yen LIBOR versions. The FCA announced on 29 September 2021 its decision on a fair, transparent and appropriate way of calculating synthetic LIBOR, approximating what LIBOR might have been in the future. The method is robust against manipulation and was supported by a large majority of respondents as set out in the Feedback Statement.
The FCA also states on its new webpage that:
- It has told lenders who are replacing LIBOR with an alternative rate in their contracts, especially those related to mortgages, to treat their customers fairly. They should communicate with borrowers in good time and ensure they are able to consider all options in advance of LIBOR becoming unavailable.
- Although 5 US dollar LIBOR settings will continue to be calculated by panel bank submission until end-June 2023, the FCA has also confirmed that the use of US dollar LIBOR will not be allowed in most new contracts written after 31 December 2021. The move to end the use of US dollar LIBOR in new contracts is supported by regulators in the US and around the world. The FCA has provided clarification to help firms implement this restriction.
- It will give a final form of the Notice as required by Article 23D(2) to IBA on 1 January 2022. The Notice will take immediate effect after it is given to IBA and after the Article 23A(4) Notice takes effect at 00:01 on 1 January 2022.
- It will publish the final Notice on 1 January 2022 on its website.
The FCA will shortly publish a detailed Feedback Statement on responses received to its consultation on the ‘use’ of LIBOR after end-2021.