On June 30, the Financial Conduct Authority (the “FCA”) launched a consultation on the completion of the transition from the remaining “synthetic” sterling LIBOR parameters at 1 month, 3 months and 6 months to the US dollar LIBOR parameters. of 5 panel banks (the “”Consultation”). The consultation closes on 24 August 2022. In this law-now, we summarize the consultation and the current position regarding the use of these metrics in the lending markets.
As a recap, all panel bank LIBOR settings, other than the US$5 settings, ceased permanently on December 31, 2021, but the publication of 1-month, 3-month and 6-month sterling LIBOR and yen LIBOR Japanese at 1 month, 3 months and 6 months on a non-representative and synthetic basis continued. Although not permitted in most new contracts, the remaining 5 USD LIBOR parameters (Overnight, 1 Month, 3 Months, 6 Months and 12 Months) will continue to be calculated by submitting the panel’s bank until June 2023.
The purpose of the continued publication of “synthetic LIBOR” parameters was to help mitigate the risk of widespread disruption of legacy LIBOR contracts that had not been transferred. Further use of these synthetic LIBOR parameters is prohibited and the FCA has made it clear that the continuation of synthetic LIBOR is only temporary, the FCA may also change the scope of permitted use of the synthetic parameters.
Yen synthetic LIBOR settings will cease at the end of 2022, and market participants must have made the transition by then. It is not proposed to extend this deadline.
Sterling
In the sterling loan market, the FCA understands that the remaining sterling LIBOR syndicated loans have been more difficult to push through, particularly in the context of complex and large multi-currency syndicated loans. The FCA considers that the continued publication of synthetic LIBOR until the end of March 2023 should allow sufficient time for these remaining loans to transition. For Private Financial Initiative (PFI) loans, where local authority consent is also required, the FCA considers that the additional 15 months of synthetic LIBOR will have provided sufficient time for the relevant approval process for all consents are obtained.
The FCA predicts that the synthetic 1-month and 6-month sterling settings could be withdrawn without prohibitive disruption, but that the position for the 3-month setting is less clear with potential difficulties converting mortgages where consent is required from retail borrowers.
The consultation solicits the views and reasoning of market players on:
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whether the synthetic 1-month and 6-month LIBOR settings can be ordered terminated in March 2023, rather than December 31, 2022 as originally proposed. The FCA considers that this additional period of 3 months would give market participants sufficient notice
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any impediments to the transition of 1 and 6 month LIBOR exposures by March 2023, and if so, the asset classes/contract types affected and the relevant LIBOR parameter
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when it will be possible for the synthetic 3-month sterling LIBOR setting to end in an orderly fashion
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any impediments to the transition of sterling 3-month synthetic LIBOR exposures by March 2023, and if so, the asset classes/contract types affected
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any specific contracts related to sterling LIBOR that will not be able to face termination regardless of the time available.
American dollars
Regarding the US dollar parameters, the FCA will consider whether the remaining 5 parameters can be removed in an orderly manner on June 30, 2023, or whether a synthetic US dollar LIBOR rate is appropriate for contracts that do not fall under LIBOR. – related federal legislation. Based on feedback from UK-regulated firms with high exposure to US dollar LIBOR parameters, the FCA understands that the transition is progressing well and should be on track to end in June 2023. The FCA is focused on contracts LIBOR in US dollars and not governed by US law. US-law contracts will either be subject to federal legislation that mandates a clear mechanism to transition to alternative rates in June 2023, or should already contact robust fallbacks for the termination of LIBOR.
The consultation seeks information on the transition from US dollar LIBOR and the size and nature of remaining exposures, recognizing that there may be exposures of which the FCA is unaware and local factors to take into account into account regarding the location of counterparties and applicable laws. With regard to emerging markets, the FCA considers that the additional 18 months of panel-bank LIBOR gave companies additional time to complete their renegotiation processes.
The Consultation seeks views and arguments on:
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whether it will be possible to transfer remaining US dollar LIBOR exposures before June 2023
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any impediments to the transition of US dollar exposures by June 2023, and if so, the asset classes/types of contracts affected and the relevant LIBOR parameter, and where such contracts do not fall under UK law /US, details of relevant provisions that require adjustment
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any specific contract linked to US dollar LIBOR that will not be able to face termination regardless of the time available
With respect to considerations for a possible synthetic LIBOR in US dollars, the FCA seeks views on any challenges or issues that may arise from the publication of a similar synthetic LIBOR in US dollars for the 1-month, 3-month and 6 months. The Alternative Reference Rates Committee in the United States (the “ARRC”) has formally recommended the term SOFR rate published by CME for legacy contracts that have adopted the fallback language of the ARRC. This rate should be made available for use in a synthetic US dollar LIBOR. The FCA is clear that market participants should not rely on the publication of any synthetic US dollar LIBOR, or the availability of such a rate for all legacy contracts.
The consultation invites comments on the impact of publishing a synthetic LIBOR rate in US dollars and any unintended negative consequences.
The FCA will take into account the comments received during the consultation when considering its decision to mandate continued publication of synthetic LIBOR for the 3 sterling settings and later this year will inform the market of the outcome. In due course, the FCA will also assess whether to require publication of synthetic LIBOR for US dollar parameters.
See here to access the full Consultation. FCA invites comments from:
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Regulated and unregulated users of the remaining Synthetic Sterling LIBOR and US Dollar LIBOR parameters, including consumers and relevant trade associations, inside and outside the UK
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Service providers for LIBOR-related contracts and/or LIBOR users (lawyers, agents, advisers and third-party administrators)
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The administrator of LIBOR and possibly the administrators of other benchmarks
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Other stakeholders with an interest in the orderly liquidation of LIBOR, for example, international authorities.
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 Endeavor Square London E20 1JN, or by email to [email protected]
