The UK Financial Conduct Authority (FCA) has issued its final LIBOR publications before the important end-2021 deadline.
LIBOR is currently based on submissions provided by a panel of banks. These submissions are mostly based on estimates intended to reflect the interest rate at which banks could borrow money on unsecured terms in wholesale markets. The move away from LIBOR to risk-free rates, which are based on transactions rather than estimates, has been a global effort led by the FCA and the Bank of England in conjunction with industry and overseas regulators.
From 1 January 2022, 24 of the 35 LIBOR settings, which relate to specific currencies and time periods, will no longer be available. For the LIBOR settings that are continuing for a further time limited period after end-2021, Edwin Schooling Latter, Director of Markets and Wholesale Policy and Wholesale Supervision, outlined in his speech the further actions the FCA expects firms to take.
Six sterling and yen LIBOR settings will continue for the duration of 2022 but will be calculated in a way that does not rely on submissions from panel banks, and is instead based on the risk-free rates. This is called ‘synthetic’ LIBOR.
New use of these synthetic LIBOR rates will not be allowed, but the FCA has decided to permit use of these synthetic rates in all legacy contracts, except for cleared derivatives. Cleared sterling and yen LIBOR derivatives will be converted to risk-free rates before end-2021.
On 1 January the FCA will publish Notices requiring LIBOR’s administrator to change the way these six LIBOR settings are calculated, and allowing their use in legacy contracts.
Five US dollar LIBOR settings will continue to be calculated using panel bank submissions until mid-2023. The FCA has decided to restrict new use of US dollar LIBOR from end-2021, with limited exceptions. This aligns with supervisory guidance issued by US authorities and supported by the Financial Stability Board and IOSCO.
The FCA consulted on its proposals for allowing legacy use of synthetic LIBOR and restricting new use of US dollar LIBOR in September and confirmed its final decisions in November.
The regulator has also published a technical Notice to make sure that its decision to allow legacy use of the synthetic sterling and Japanese yen LIBOR settings, comes into effect at the same time as the overall ban on use.