On 8 December 2021, Edwin Schooling Latter, Director of Markets and Wholesale Policy and Wholesale Supervision at the Financial Conduct Authority (FCA), delivered a speech at Risk.net’s LIBOR telethon.
Highlights from the speech include:
- The FCA’s March 2021 Dear CEO letter outlines the regulator’s expectations for regulated firms to meet milestones and targets of relevant supervisory authorities. The FCA encourages firms to take note and act accordingly.
- If a firm is an issuer of a LIBOR bond that has not yet been converted, then it still needs to act. Mr Latter reports that the 90 successful consent solicitations to date should give firms confidence that this process works for bonds issued in sterling, and prospectively other LIBOR currencies, under UK law. Mr Latter does not suggest that the firm should complete this by New Year’s Eve if it has not yet started. But the FCA decision to require publication of synthetic sterling LIBOR for the duration of 2022 gives a firm time to catch up. Choosing to convert to SONIA, over the relevant term, plus ISDA spreads would not change the expected value of the interest payments. SONIA and ISDA spreads are anyway the two components of synthetic LIBOR. But synthetic LIBOR will not last. SONIA will.
- There may never be as many experts in LIBOR transition as there are right now. And awareness of the need to transition may also be at its peak. Synthetic LIBOR is a bridge to risk free rates. It is not a permanent solution. So firms should not rely on synthetic LIBOR lasting. The FCA strongly encourages firms to complete the transition whilst expertise and awareness are at their greatest.
- Synthetic LIBOR is temporary. The FCA has already made clear that synthetic yen LIBOR will be for one year only, ceasing at end-2022.
- The FCA has not yet decided whether it should extend the sterling synthetic rates beyond end-2022.
- One issue on which the FCA has received incoming queries relates to so-called ‘dealer polls’. These are fallback arrangements, designed in times rather different from today, and designed more for a temporary rather than a permanent interruption to LIBOR publication. In essence, they ask a counterparty or calculation agent to collect quotes for borrowing rates from a range of dealers, in lieu of LIBOR itself. They may be the main fallback, or a step in a waterfall of fallbacks. Mr Latter notes that the FCA previously noted that it would be optimistic to think these will work given that a principal reason for the end of LIBOR is banks’ unwillingness to continue to provide such quotes for LIBOR itself. Although the FCA has asked for any information that suggests otherwise, Mr Latter reports that it is not aware at this point of any firm that has confirmed a willingness to provide rates in response to such a poll after the relevant LIBOR setting is no longer published, other than where they have a contractual commitment to do so. The FCA does not think it would be appropriate or reasonable for it to put regulatory pressure on firms to respond to such polls. The FCA understands that this would create a variety of conduct and other risks. However, banks that might receive such dealer polls’ requests may wish to consider setting up a centralised point to receive and make clear if any response will be provided to such requests. They may wish to consider being clear in their client or other communications where they have policies to decline to respond.
The FCA has also published a new webpage, FCA issues final messages on LIBOR before end-2021.
In summary, the new FCA webpage reminds firms that:
- From 1 January 2022, 24 of the 35 LIBOR settings, which relate to specific currencies and time periods, will no longer be available.
- Six sterling and yen LIBOR settings will continue for the duration of 2022 but will be calculated in a way that does not rely on submissions from panel banks, and is instead based on the risk-free rates. New use of these synthetic LIBOR rates will not be allowed, but the FCA has decided to permit use of these synthetic rates in all legacy contracts, except for cleared derivatives.
- Cleared sterling and yen LIBOR derivatives will be converted to risk-free rates before end-2021. On 1 January 2022, the FCA will publish notices requiring LIBOR’s administrator to change the way these six LIBOR settings are calculated, and allowing their use in legacy contracts, in line with the draft notices the FCA published previously.
- Five US dollar LIBOR settings will continue to be calculated using panel bank submissions until mid-2023. The FCA has decided to restrict new use of US dollar LIBOR from end-2021, with limited exceptions. This aligns with supervisory guidance issued by US authorities and supported by the Financial Stability Board and the International Organization of Securities Commissions.
- The FCA consulted on proposals for allowing legacy use of synthetic LIBOR and restricting new use of US dollar LIBOR in September and confirmed its final decisions in November. The FCA has now published a detailed Feedback Statement (FS21/12) setting out its responses to the comments received through the consultation.
- The FCA has published a technical notice to make sure that its decision to allow legacy use of the synthetic sterling and Japanese yen LIBOR settings, comes into effect at the same time as the overall ban on use.
The FCA has also updated its webpage, Benchmarks Regulation: our proposed new powers, policy and decision-making.
The FCA has added new text which reads: “In December 2021 we published a Feedback Statement (FS21/12) on responses to our Article 23C and Article 21A decision consultation. We will issue the Notices under Article 23C and 23D in substantially the same form on 1 January 2022 and the requirements will become effective immediately. We fully expect the final form of the notices to mirror the drafts already provided. We also intend to issue a statement early in the New Year confirming that the 1, 3 and 6 month sterling and yen LIBOR settings are permanently unrepresentative Article 23A benchmarks, in line with the Notice we published in September.”