Our previous Law-Nows in July and October discussed the market consultation of the FCA earlier this year on the cessation of synthetic sterling LIBOR settings and its initial consideration of the potential publication of synthetic US dollar settings, and the FCA’s subsequent decision to permanently cease publication of the 1 month and 6 month synthetic LIBOR settings after 31 March 2023. See FCA consultation on synthetic LIBOR - cessation of sterling settings and potential publication of US dollar settings and 1 and 6 month synthetic sterling LIBOR settings to cease after 31 March 2023.
Panel bank LIBOR settings
By way of recap, all panel bank LIBOR settings, other than 5 US dollar settings, ceased permanently on 31 December 2021.
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 the end of June 2023.
Synthetic LIBOR settings
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 ahead of cessation of the panel bank settings.
New use of these synthetic LIBOR settings is prohibited and the FCA has been clear that the continuation of synthetic LIBOR is temporary only.
Yen: synthetic yen LIBOR settings will cease permanently at the end of 2022 as previously indicated.
Sterling: 1 month and 6 month synthetic sterling LIBOR will cease permanently after 31 March 2023. Following responses to the market consultation earlier this year, the FCA extended publication of the 3 month setting after the end of March 2023 but the FCA has now confirmed that the 3 month synthetic sterling LIBOR setting will cease after 31 March 2024.
US Dollar: there will be no synthetic settings for overnight and 12 month US dollar LIBOR. The FCA has confirmed it does not think there is a case for publication of these rates on a synthetic basis. The FCA is proposing to require publication of 1 month, 3 month and 6 month synthetic US dollar LIBOR for a short period of time, until 30 September 2024 and permitting use of these settings in all contracts other than cleared derivatives.
The Consultation seeks views on:
- the proposals to require publication of the 1 month, 3 month and 6 month US dollar LIBOR settings on a synthetic basis until the end of September 2024. The FCA has explained that there is significant exposure to US dollar LIBOR outside the US, including in the UK. It was estimated in 2021 that globally, over US$70 trillion of US dollar LIBOR exposures would remain outstanding beyond the cessation of the US dollar LIBOR panel bank rate at the end of June 2023. In the US, federal legislation was enacted in March 2022 to transition contracts governed by US law that contain no, or unworkable, fallbacks, to alternative rates when the US dollar LIBOR panel bank rate is ceased. The FCA expects that there will be a pool of outstanding legacy contracts governed by UK or other non-US law, that are not covered by the US federal legislation and that have no realistic prospect of being amended to transition by the end of June 2023;
- the appropriate methodology for constructing the synthetic US dollar LIBOR settings. The FCA is proposing that synthetic US dollar LIBOR would be calculated as the sum of the CME Group Benchmark Administration Limited’s (“CME”) Term SOFR Reference Rate plus the International Swaps and Derivatives Association (“ISDA”) fixed spread adjustment for the corresponding LIBOR setting. The FCA proposes to follow the same approach for synthetic US dollar LIBOR settings as for synthetic sterling and yen LIBOR settings, in line with their policy framework. The CME Term SOFR Reference Rate has been endorsed by the Alternative Reference Rates Committee in the US and the FCA has chosen this term rate than the ICE Term SOFR Rate, considering that it will better satisfy its policy consideration of market support and the likely effect outside the UK; and
- the scope of the permitted use of these synthetic settings. The FCA proposes to permit the use of the synthetic US dollar LIBOR settings for all contracts other than cleared derivatives.
The Consultation closes on 6 January 2023.The FCA announcement of 23 November 2022 is available here: Further consultation and announcements on the wind-down of LIBOR | FCA.
See here to access the Consultation in full: CP22/21: Consultation on ‘synthetic’ US dollar LIBOR and feedback to CP22/11 (fca.org.uk)
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 [email protected].