Wind down of LIBOR at year-end

The FCA will also be preparing legacy contracts that reference the one, three and six-month sterling and Japanese yen LIBOR setting by requiring the benchmark administrator to publish these settings under a “synthetic” methodology. This will be based on risk-free rates and will be in place 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. In addition to this, a consultation paper on the FCA’s proposed decision on which legacy contracts can use these synthetic LIBOR rates has been published.

Currently the ICE Benchmark Administration publishes 35 LIBOR settings covering sterling, the US dollar, the Japanese yen, the Swiss franc and the euro, with the publication of 24 of these settings ceasing at the end of 2021. The FCA also 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.

The FCA has changed these to synthetic rates, providing a reasonable and fair approximation of what panel bank LIBOR might be used in the future. The synthetic rates will no longer be “representative” as defined in the Benchmarks Regulation.

Commenting on this, the FCA’s director of markets and wholesale policy Edwin Schooling Latter said: “Market participants have made huge progress in moving away from LIBOR. Today’s publications confirm some important details of how LIBOR will now be brought to an end.

“New use of sterling, Japanese yen, Swiss franc, euro, and – with only limited exceptions, US dollar – LIBOR will have to stop at the end of 2021. The publication of a ‘synthetic’ rate for some sterling and Japanese yen LIBOR settings for a limited period will give market participants a bit more time to complete transition of legacy contracts.”