FCA consultation on synthetic LIBOR - cessation of sterling settings and potential publication of US dollar settings

27 July 2022

On 30 June, the Financial Conduct Authority (the “FCA”) launched a consultation on completing the transition away from the remaining 1 month, 3 month and 6 month “synthetic” sterling LIBOR settings and 5 panel bank US dollar LIBOR settings (the “Consultation”). The Consultation closes on 24 August 2022. In this Law-Now we summarise the Consultation and the current position regarding the use of these settings in the loan markets.

By way of recap, all panel bank LIBOR settings, other than 5 US dollar settings, ceased permanently on 31 December 2021 but publication of 1 month, 3 month and 6 month sterling LIBOR, and 1 month, 3 month and 6 month Japanese yen LIBOR on a non-representative, synthetic basis has continued. Whilst not permitted in most new contracts, the remaining 5 US dollar LIBOR settings (overnight, 1 month, 3 month, 6 month and 12 month) will continue to be calculated by panel bank submission until June 2023. 

The purpose of the continued publication of the “synthetic LIBOR” settings was to assist in mitigating the risk of widespread disruption to legacy LIBOR contracts which had not transitioned. New use of these synthetic LIBOR settings is prohibited and the FCA has been clear that the continuation of synthetic LIBOR is temporary only, the FCA can also change the scope of the permitted use of the synthetic settings.

Synthetic yen LIBOR settings will cease at the end of 2022, and market participants must have transitioned by that time. There is no proposal to extend this deadline.

Sterling

In the sterling loan market, the FCA understands that the remaining sterling LIBOR syndicated loans have been more difficult to transition, particularly in the context of complex multi-currency, large syndicated loans. The FCA considers that the continued publication of synthetic LIBOR to end-March 2023 should be sufficient time for these remaining loans to transition. In relation to private finance initiative (PFI) loans, where local authority consent is also required, the FCA considers that the additional 15 months of synthetic LIBOR will have provided sufficient time for the relevant approval process for all consents to be obtained.

The FCA anticipates that the 1 month and 6 month synthetic sterling settings could be retired without prohibitive disruption, but that the position for the 3 month setting is less clear with potential difficulties converting mortgages where consent is required from retail borrowers. 

The Consultation seeks views and reasoning from market participants on:

  • whether the 1 month and 6 month synthetic sterling LIBOR settings can cease in an orderly fashion in March 2023, rather than 31 December 2022 as initially proposed. The FCA considers that this additional 3 months would give market participants adequate notice
  • any obstacles to transitioning 1 and 6 month LIBOR exposures by March 2023, and if so, the affected asset classes/types of contracts, and relevant LIBOR setting
  • when it will be possible for the 3 month synthetic sterling LIBOR setting to cease in an orderly fashion
  • any obstacles to transitioning 3 month synthetic sterling LIBOR exposures by March 2023, and if so, the affected asset classes/types of contracts
  • any specific contracts linked to sterling LIBOR that will be unable to cope with cessation regardless of the time available.

US dollar

In relation to the US dollar settings, the FCA will consider whether the remaining 5 settings can be wound down in an orderly fashion on 30 June 2023, or whether a synthetic US dollar LIBOR rate is appropriate for contracts which are outside of the scope of LIBOR-related federal legislation. On the basis of feedback from UK-regulated firms with high exposures to US dollar LIBOR settings, the FCA understands that transition is progressing well and is expected to be on track for cessation in June 2023. The FCA’s focus is on US dollar LIBOR contracts not governed by US law. US law contracts will either be subject to federal legislation which imposes a clear mechanism for transition to alternative rates in June 2023 or should already contact robust fallbacks for LIBOR’s cessation.

The Consultation seeks information on the transition of US dollar LIBOR and the size and nature of the remaining exposures, recognising that there may be exposures of which the FCA is not aware and local factors to consider in relation to the location of counterparties and governing laws. In relation to emerging markets, the FCA considers that the additional 18 months of panel-bank LIBOR has provided firms with additional time to complete their renegotiation processes.

The Consultation requests views and reasoning on:

  • whether it will be possible to transition remaining US dollar LIBOR exposures ahead of June 2023
  • any obstacles to transitioning US dollar exposures by June 2023, and if so, the affected asset classes/types of contracts, and relevant LIBOR setting, and where these contracts are other than UK/US law, details of relevant provisions which require adjustment
  • any specific contracts linked to US dollar LIBOR that will be unable to cope with cessation regardless of the time available.

As to considerations for a potential synthetic US dollar LIBOR, the FCA is seeking views on any challenges or issues that might arise from the publication of a similar synthetic US dollar LIBOR for the 1 month, 3 month and 6 month settings. The Alternative Reference Rates Committee in the US (the “ARRC”) has formally recommended the term SOFR rate published by CME for legacy contracts which have adopted the ARRC fallback language. This rate would need to be made available for use in a synthetic US dollar LIBOR.  The FCA are clear that market participants should not rely on any synthetic US dollar LIBOR setting being published, nor on any such rate being available for all legacy contracts. 

The Consultation seeks feedback on the impact of publication of a synthetic US dollar LIBOR rate, and whether there would be any unintended adverse consequences.

The FCA will consider feedback received to the Consultation in reviewing their decision to compel continued publication of synthetic LIBOR for the 3 sterling settings and later this year notify the market of the outcome. In due course the FCA will likewise assess whether to require publication of synthetic LIBOR for US dollar settings.

See here to access the Consultation in full.  The FCA is seeking feedback from:

  • Regulated and unregulated users of the remaining synthetic sterling LIBOR and US dollar LIBOR settings, including consumers, and relevant trade associations, both within and outside the UK 
  • Service providers for LIBOR-linked contracts and/or users of LIBOR (lawyers, agents, advisers and third-party administrators)
  • The administrator of LIBOR and possibly the administrators of other benchmarks
  • Other stakeholders with an interest in the orderly wind down of LIBOR, for example, international authorities.

You can respond to the Consultation using the form on the FCA website at: Online Survey Software | Qualtrics Survey Solutions (fca.org.uk), or in writing to Benchmarks Policy Financial Conduct Authority 12 Endeavour Square London E20 1JN, or by email to cp22-11@fca.org.uk.

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