FCA gives further guidance to synthetic LIBOR use, USD transition

abdelaziz Fathi

Britain’s financial markets regulator today released further details of measures designed to mitigate potential market disruption as the LIBOR regime comes to an end next month.

Other than cleared derivatives, the Financial Conduct Authority (FCA) said it would allow LIBOR to be published on a “synthetic” basis for all legacy contracts that have not been changed by December 2021.

As for the new contracts, these synthetic rates will not be available for use and no longer be representative of their underlying markets at the end of this year. As such, firms need to prepare to use alternative reference rates for their new trades from the start of next year, irrespective of which LIBOR they use.

The regulator also confirmed the June-2023 end date for most US dollar LIBOR settings. However, only five settings will continue to be calculated by panel bank submission until that date, but the use of US dollar LIBOR will not be allowed in most new contracts. The move to end the use of US dollar LIBOR in new contracts is supported by regulators in the US and around the world, the FCA said.

Edwin Schooling Latter, Director of Markets and Wholesale Policy, commented: ‘Today’s publications form some of the final building blocks in the transition from LIBOR, a global effort led by the FCA and the Bank of England in conjunction with industry and overseas regulators. But work should not stop here. While synthetic LIBOR reduces risk in the transition and provides a bridge to Risk-Free Rates like SONIA, it will not last indefinitely and contracts need to be moved away from LIBOR wherever possible.’

With the end of LIBOR drawing closer, the Financial Conduct Authority (FCA) is encouraging market participants to actively transition from referencing LIBOR rates in their trades. 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.

The FCA has been taking steps to promote the switch from LIBOR to SONIA. Throughout the last few months, they actively provided guidance to lenders, borrowers and investors who are amending their documentation to reference SONIA.

The FCA has confirmed that all LIBOR settings will either cease to be provided by any administrator or no longer be representative after December 31, 2021.

The news comes as the scandal-ridden LIBOR is set to retire at the end of 2021 as the world’s most important benchmark following a multi-year rigging scandal by a major lender since the 2008 financial crisis.

Global regulators urged market participants earlier last year to accelerate the shift to the Sonia overnight rate before it ceases issuance of cash products, referencing Libor by the fourth quarter.

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