On 21 October 2020, HM Treasury published a Policy Paper ‘Amendments to the Benchmarks Regulation to support LIBOR transition’.

The Policy Paper refers to the Financial Services Bill (Bill) that the UK Government has brought forward which, among other things, amends the Benchmarks Regulation, providing an overarching legal framework which gives the FCA new and enhanced powers to manage the wind-down of a critical benchmark. The legislation does not pre-determine or fix outcomes for parties to contracts, but instead enables the FCA to take an appropriate course of action in order to protect consumers and ensure market integrity.

The Policy Paper provides the following summary:

  • The Bill provides new and enhanced powers for the FCA where it has determined that a critical benchmark is at risk of becoming unrepresentative, or has become unrepresentative, and that its representativeness cannot reasonably be maintained or restored. In particular, in order to provide for the orderly wind-down of the benchmark, the FCA will be able to direct a change in the methodology of a critical benchmark and extend its publication for a limited time period for the benefit of “tough legacy” contracts.
  • In such a scenario, use of that benchmark by UK supervised entities will be prohibited. However, in order to ensure an orderly wind-down of the benchmark for “tough legacy” contracts, the FCA will have discretion to determine specific categories of contracts which will be exempt from this prohibition on use. HM Treasury and the FCA are of the view that this exemption is intended for those contracts that genuinely have no realistic ability to be renegotiated or amended to transition to an alternative benchmark.
  • Before exercising certain new powers, the FCA will be required to issue statements of policy to inform the market about how it intends operationalise the legal framework set out under the Benchmarks Regulation. The FCA will be able to engage with industry stakeholders and international counterparts as appropriate through this process.
  • As the home jurisdiction of LIBOR’s administrator, the UK has a distinct role to play in minimising financial stability risks and disruption to financial systems from LIBOR wind-down in the UK and globally.