FCA extends synthetic US dollar Libor to September 2024
The UK Financial Conduct Authority (FCA) today said it will give, for the last time, banks an extra 15 months to stop using a “synthetic” version of US dollar Libor.
Britain’s financial markets regulator has required ICE Benchmark Administration Limited (IBA) to continue to publish 1- and 6-Month “synthetic” US dollar LIBOR settings until September 2024, extending the deadline past its original end date of June 2023. The decision follows feedback from the industry that a number of US dollar cash contracts, particularly outside the US, would benefit from a continued publication.
The US dollar Libor was originally due to cease after less than three months, but the UK regulator used its powers under the Benchmarks Regulation (BMR) to temporarily extend publication under an unrepresentative synthetic methodology in order to assist with legacy transitions.
However, the FCA confirmed it has no intention to use its powers to compel continued publication beyond this date, and that therefore these settings will permanently cease immediately after final publication at the end of September 2024.
The FCA and BoE have been taking steps to promote the switch from LIBOR to SONIA. Throughout the last few years, they actively provided guidance to lenders, borrowers and investors who are amending their documentation to reference SONIA.
Nevertheless, the transition from US dollar LIBOR remains of critical importance globally, including in the UK where many firms are active in US dollar interest rate markets.
LIBOR, which underpins more than $300 trillion in derivatives and other instruments, is set to be replaced worldwide with the Bank of England’s Sonia rate for sterling-denominated swaps, loans and futures.
Global regulators urged market participants to accelerate the shift to the Sonia overnight rate before it ceases issuance of cash products, referencing Libor by the fourth quarter.
The move to end the use of US dollar LIBOR in new contracts is supported by regulators in the US and around the world.
As the end of LIBOR was drawing closer, the FCA and Britain’s central bank encouraged market participants to actively transition from referencing LIBOR rates in their sterling and USD derivatives.
Instead of interbank offered rates, the FCA notes that overnight SONIA is now fully embedded across FX markets. Successful CCP conversion processes saw some of the largest single day amendments to financial contracts, with in excess of £13 trillion LIBOR-referencing contracts converted to SONIA.
This shift is expected to boost liquidity in these products, which aided relevant providers in achieving the Working Group’s key milestone of ceasing LIBOR-linked derivatives.