The sterling, Japanese yen, Swiss franc and euro LIBOR panels are ceasing on 31 December 2021.
Today, the Financial Conduct Authority (FCA) confirms that to avoid disruption to legacy contracts that reference the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings, it will require the LIBOR benchmark administrator to publish these settings under a “synthetic” methodology, based on term risk-free rates, for the duration of 2022. These six LIBOR settings will be available only for use in some legacy contracts, and are not for use in new business.
ICE Benchmark Administration currently publishes 35 LIBOR settings covering sterling, US dollar, Japanese yen, Swiss franc and euro. As set out in the FCA’s March announcement, publication of 24 of these settings will cease at end-2021. We expect that 5 US dollar settings (overnight, and 1-, 3-, 6- and 12-month) will continue to be published based on the current “panel bank” LIBOR methodology, and on a representative basis, until end-June 2023.
Today, the FCA published notices confirming its decisions to compel the continued publication of the remaining 6 sterling and Japanese yen LIBOR settings for a limited time period after end-2021, using a “synthetic” methodology. This is to help ensure an orderly wind-down.
The synthetic rate has been chosen by the FCA to provide a reasonable and fair approximation of what panel bank LIBOR might have been in the future. The synthetic rates will no longer, however, be “representative” as defined in the Benchmarks Regulation (BMR).
The FCA has confirmed the methodology it will require LIBOR’s administrator to use for calculating these “synthetic” rates, following its consultation proposals, as:
- forward-looking term versions of the relevant risk-free rate (ie the ICE Term SONIA Reference Rates provided by ICE Benchmark Administration for sterling, and the Tokyo Term Risk Free Rates (TORF) provided by QUICK Benchmarks Inc., adjusted to be on a 360 day count basis, for Japanese yen), plus
- the respective ISDA fixed spread adjustment (that is published for the purpose of ISDA’s IBOR Fallbacks for the 6 LIBOR settings).
These six LIBOR settings will become permanently unrepresentative of their underlying markets from 1 January 2022. The first non-representative publication under their “synthetic” methodology will be on 4 January 2022.
The FCA will decide and specify before year-end which legacy contracts are permitted to use these synthetic LIBOR rates. At least for the duration of 2022, the FCA is proposing to permit legacy use of synthetic sterling and Japanese yen LIBOR in all contracts except cleared derivatives. Clearing houses plan to transition all cleared sterling, Japanese yen, Swiss franc and euro LIBOR contracts to risk-free rates by end-2021.
Users of LIBOR should continue to focus on active transition rather than relying on synthetic LIBOR. Synthetic LIBOR will not be published indefinitely. The FCA must review the use of its power to require publication of a ceasing benchmark at least annually (up to a maximum period of 10 years). For the three Japanese yen settings, the FCA does not intend to renew the requirement, and publication will therefore cease at end-2022.
The FCA will also consider progressively restricting continued permission to use synthetic LIBOR in legacy contracts if this would help maintain progress towards an orderly cessation, and thereby support its objectives to protect consumers or market integrity. This may be necessary if, for example, work to reduce the stock of outstanding legacy LIBOR contracts does not continue.
The regulator also continues to monitor progress in US dollar LIBOR transition. The FCA proposes to prohibit most new use of US dollar LIBOR after end-2021, in line with US guidance and existing FCA and PRA supervisory expectations.
The decisions to require publication of some sterling and Japanese yen LIBOR settings on a synthetic basis are not determinative of any future decisions in respect of US dollar LIBOR from end-June 2023.