In our Law-Now at the end of July we discussed the market consultation of the Financial Conduct Authority (the “FCA”) on the cessation of synthetic sterling LIBOR settings and the potential publication of synthetic US Dollar settings (the “Consultation”). See - FCA consultation on synthetic LIBOR - cessation of sterling settings and potential publication of US dollar settings (cms-lawnow.com). The Consultation closed in August. In this Law-Now we discuss the FCA’s first announcement in response to the Consultation on 29th September 2022 which confirmed that publication of 1 and 6 month synthetic LIBOR will permanently cease after 31 March 2023.
By way of recap, all panel bank LIBOR settings, other than 5 US dollar settings, ceased permanently on 31 December 2021. 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 in order to help mitigate the risk of widespread disruption to legacy LIBOR contracts which had not transitioned. 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.
New use of the synthetic LIBOR settings is prohibited and the FCA has been clear that the continuation of synthetic LIBOR is temporary only.
In the Consultation the FCA sought views from market participants 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. Synthetic yen LIBOR settings will cease permanently at the end of 2022 as previously indicated.
1 and 6 month synthetic sterling LIBOR
The FCA has confirmed that it will require continued publication of 1 and 6 month synthetic sterling LIBOR for a further 3 months after the end of 2022 until 31 March 2023 after which these settings will permanently cease.
The FCA reported that the majority of the respondents to the Consultation agreed that these settings could cease in an orderly fashion at the end of March 2023 or were neutral. Feedback to the Consultation suggested remaining exposure to these settings is low and that the definitive end date could assist remaining transition.
Market participants are encouraged to ensure they are prepared for this permanent cessation of these settings – in the absence of robust fallbacks, issuers and bondholders must agree to convert bonds to fair alternative rates, and lenders and borrowers in the loan markets should agree appropriate arrangements. In particular, responses to the Consultation reported that some private finance initiative (PFI) loans (where local authority consent is required) remain linked to 6 month sterling LIBOR. These should be amended now as a matter of urgency.
3 month synthetic sterling LIBOR
The FCA is still considering the Consultation responses in relation to the cessation of 3 month sterling LIBOR. Responses were supportive of extending the publication after end March 2023 and a significant number argued for the need for advance notice ahead of permanence cessation. The FCA reminds market participants with contracts referencing 3 month sterling LIBOR that they should prepare for its cessation in due course. The FCA will provide further information when it publishes its summary of feedback on this.
The FCA is considering the feedback received to the Consultation questions on exposures to US dollar LIBOR and will respond later this autumn.
The FCA announcement of 29 September 2022 is available here: FCA announces decision on cessation of 1- and 6-month synthetic sterling LIBOR at end-March 2023 | FCA