The UK’s financial regulator has confirmed that the London Interbank Offered Rate (LIBOR) will cease on December 31, 2021.

The decision applies to the sterling, Japanese yen, Swiss franc, and euro LIBOR panels, the Financial Conduct Authority (FCA) said in a statement published at the end of September. 

Synthetic LIBOR

To avoid disruption to legacy contracts that reference the one-, three- and six-month sterling and Japanese yen LIBOR settings, the FCA said it will require the LIBOR benchmark administrator to publish these settings under a ‘synthetic’ methodology. 

The methodology will be based on term “risk-free” rates, and will be in force for the duration of 2022. 

The six LIBOR settings mentioned above will therefore be available only for use in some legacy contracts, and will not be available for use in new business.

Also last month, the FCA published a consultation paper on its proposed decision as to which legacy contracts can use the synthetic LIBOR rates outlined below.

The Intercontinental Exchange (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 5 March announcement, publication of 24 of these settings will cease on December 31, 2021. 

The FCA expects that five US dollar settings (overnight, and one-, three-, six- and 12-month) will continue to be published based on the current ‘panel bank’ LIBOR methodology and on a representative basis until the end of June 2023.

Last month, the FCA also published notices confirming its decisions to compel the continued publication of the remaining six sterling and Japanese yen LIBOR settings for a limited time period after the end of 2021 using a ‘synthetic’ methodology. 

This, the FCA noted, is to help ensure an “orderly wind-down” from LIBOR.

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. 

However, the synthetic rates will no longer be “representative”, as defined in the Benchmarks Regulation (BMR).

Industry perspectives

Dave Grace, managing principal at Capco, a global technology and management consultancy specialising in digital transformation in the financial services industry, welcomed the FCA’s decision.

“The FCA’s proposals to support the publication of a ‘synthetic’ LIBOR rate for some sterling and Japanese yen LIBOR settings until the end of 2022 will give market participants some badly needed breathing space to complete the transition of legacy contracts and avoid the potential year-end cliff edge,” said Grace.

“It also allows the FCA to discharge its regulatory obligations in a sensitive and pragmatic way, to allow an orderly administration of LIBOR referencing contracts post-year.” 

Grace added that many participants have not been able to transition all of their client-facing trades and positions to risk-free rates ahead of the Prudential Regulation Authority’s September deadline, so the FCA’s decision should come as relief.

However, it should also be noted that synthetic LIBOR merely delays the overall process, as transitions are still expected for trades and positions that mature post-2023.

“Most larger institutions will have adhered to the International Swaps and Derivatives (IDSA) protocol, but the announcement of the provision for ‘synthetic LIBOR’ will be welcomed by market participants to allow a smooth year-end path for those counterparties who have not adhered to the protocol,” he said.

“The big question is whether the Federal Reserve will announce a ‘synthetic rate’ for the USD LIBOR trades nearer to cessation in June 2023, or will the industry have enough time to transition legacy contracts?”

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