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This month the FCA announced that the publication of 24 LIBOR settings has ended and that the six most widely used sterling and yen settings will be published using ‘synthetic’ rates. Although most firms have been preparing for this change for some time, it’s worth some final checks to make sure your house is in order
LIBOR – the London Interbank Offered Rate – has been a key benchmark for more than 40 years. It has been used for setting the interest rates charged on adjustable-rate loans, mortgages and corporate debt.
Over the past year, the FCA and the ICE Benchmark Administration have issued a number of guidance notes and speeches, providing firms with more clarity on what the transition to the new reference rates looks like beyond 2021. These publications have reinforced the global impact of this transition and the complex inter-connections between the different oversight bodies involved.
- 24 of the 35 LIBOR settings, which relate to specific currencies and time periods are no longer available from the start of this year.
- Five USD LIBOR settings will continue to be calculated using panel bank submissions until mid-2023. New use of the US dollar LIBOR has been restricted since 31 December 2021, with limited exceptions. The FCA’s decision to put in place these restrictions is supported by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) and in line with the supervisory guidance issued by US authorities.
- Six sterling and yen LIBOR settings will continue for the duration of this year. However, the calculations will be based on the risk-free rates instead of submissions from panel-banks. The FCA decision to permit these synthetic rate LIBOR settings is limited to legacy contracts only. The synthetic rates cannot be used for new contracts or cleared derivatives.
- Synthetic LIBOR is made up of multiple components, two of which include Sterling Overnight Interbank Average Rate – or “SONIA” and International Swaps and Derivatives Association – or “ISDA” spreads. Synthetic LIBOR should be considered a bridge to risk free reference rates and not a permanent solution.
Timeline of the key FCA publications for LIBOR cessation
March 2021 – The FCA’s Dear CEO letter outlines the regulator’s expectations for regulated firms to meet milestones and targets of relevant supervisory authorities. The FCA has encouraged firms to take note and act accordingly.
September 2021 – FCA consulted on proposals for for allowing synthetic LIBOR and restricting new use of USD LIBOR. The FCA has 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.
November 2021 – The FCA confirmed its final decision.
December 2021 – The FCA published a Feedback Statement detailing its response to the comments received during the consultation period. The FCA has also updated its webpage, Benchmarks Regulation: our proposed new powers, policy and decision-making.
January 2022 – The FCA published a notice requiring LIBOR’s administrator to change the way the six sterling and yen LIBOR settings still in use for 2022 are calculated, and allowing their use in legacy contracts, in line with the draft notices the FCA published previously.
Five final checks for LIBOR transition
Most affected firms have already been preparing for these changes to LIBOR. At this point, we would recommend performing some final checks to make sure you remain compliant.
- If you have any outstanding uncleared LIBOR swap contracts, ensure that the ISDA protocol is signed at the earliest so that these can be converted to the new market standards of overnight SONIA, SOFR etc.
- Focus on converting any remaining LIBOR bonds/ legacy US dollar or Yen LIBOR contracts. The FCA have provided firms with some leeway on timings for this (the end of 2022 for sterling and yen, and mid 2023 for legacy US dollar contracts).
- Create and/or update your compliance framework to ensure that you have:
- adequate governance and oversight arrangements
- documented policies and procedures
- the relevant systems and controls
- requisite training in place for your firm where required to reflect these changes.
- Create and/or update your risk management framework and associated assessment and processes to ensure that all regulatory risks associated with benchmark firms are identified, articulated and appropriately mitigated.
- Regularly monitor and assess the regulatory risks that impact your firm.
We can help
At Bovill, we have a specialist Capital Markets team who have been helping clients prepare for LIBOR transition and have a deep understanding of regulatory obligations around benchmarks.
We can help you to:
- perform a health check of your firm’s compliance arrangements
- carry out an assessment of the regulatory risks that may impact your firm as a benchmark user
- update your compliance framework to assure it reflects the current market and business practice
- perform an assurance review on the arrangements you have put in place as a result of the LIBOR