Today the FCA has published a consultation on its proposed policy framework for exercising two of its new powers under the Benchmarks Regulation (BMR), which will be introduced by the Financial Services Act 2021. These powers relate to the use of critical benchmarks that are being wound down. The consultation is another important step in the wind down of LIBOR.
On 5 March 2021 the FCA confirmed the dates when the LIBOR panels will end. The FCA will soon receive new powers under the BMR to facilitate an orderly wind down of critical benchmarks like LIBOR. These could help users that cannot transition away from LIBOR before the panels end.
The FCA has already established its policy framework for how it would exercise its new powers to require continued publication of critical benchmarks using a changed methodology, and when it could access those powers. Soon it will be consulting on using those powers to implement a ‘synthetic LIBOR’ rate for some sterling and yen LIBOR settings. As noted in the FCA’s 5 March announcement, these synthetic rates would no longer be ‘representative’ under the terms of the BMR.
Where a synthetic LIBOR rate is implemented, the FCA will also need to determine who is permitted to use it. This is because use of a permanently non-representative benchmark would be prohibited under the BMR, but the FCA can permit some or all legacy use to continue. The consultation published today sets out which factors the FCA thinks are relevant in deciding what legacy use of a permanently non-representative benchmark, such as any synthetic LIBOR, it will permit to continue.
The FCA reminds market participants that any permitted use of synthetic LIBOR would not be a permanent solution, so parties will need to continue their efforts to amend their contracts.
The consultation also sets out the FCA’s proposed approach to using its power to prohibit new use of a critical benchmark which is ending. This power is separate to the legacy use power described above and will be particularly relevant to US dollar LIBOR, given most settings will continue in their current form until mid-2023. The FCA has already been clear it supports the US authorities’ approach of stopping new use of dollar LIBOR by the end of this year.
The FCA will finalise its policies in light of the feedback received. It will then aim to consult in Q3 on its proposed decisions on precisely what legacy use to allow for any synthetic sterling and yen LIBOR, and how it might restrict new use of LIBOR rates, including US dollar LIBOR. The FCA intends to confirm its final decisions as soon as practicable in Q4.
The two-stage consultation process is intended to give market participants the opportunity to engage on these important issues.
Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, commented:
‘This consultation is another step towards securing an orderly wind down of LIBOR. We encourage LIBOR users to engage with the CP as part of their work on transitioning away from LIBOR.
We have provided certainty over when the LIBOR panels will end, so there is no longer a reason for firms to delay their transition plans. It’s time to act. While we are taking steps to provide a safety-net for contracts that cannot transition, firms should be taking all reasonable steps to ensure the end of LIBOR does not lead to markets being disrupted or harm to consumers.’