Changes to LIBOR administration in the U.S. and UK
- January 12, 2021
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Kennett Square, PA
The FCA and IBA proposed changes to their respective administration of GBP LIBOR and USD LIBOR towards the end of 2020, as the LIBOR transition nears its original 2021 deadline. Details are below about the proposed legislation (FCA) and the extension of certain LIBOR tenors into 2023 (IBA).
The FCA's proposed new powers over LIBOR
There have been several updates regarding the IBOR transition over the past months. First, in the U.K., the Financial Conduct Authority (FCA) has proposed modifications to EU legislation which would give the FCA enhanced powers to designate a critical benchmark as unrepresentative and require changes to such benchmarks (here). Currently, the FCA has identified only two IBORs that could be subject to these enhanced powers: GBP LIBOR and USD LIBOR.
Under existing legislation, the FCA has the right to declare a benchmark non-representative of the underlying market. Per the newly proposed Financial Services Bill (FS Bill), the FCA can either declare a benchmark non-representative and prohibit ongoing use of the benchmark as of a date identified by the FCA. Alternatively, if the representativeness of the benchmark may be restored, the FCA could compel the benchmark administrator to make certain changes to the way the benchmark is determined. For tough legacy contracts which cannot easily transition to an alternate rate, the FCA is permitted to require the continued publication of a synthetic rate allowing these legacy contracts to continue referencing critical benchmarks without repapering. The FS Bill would authorize the FCA to mandate the continued publication of the synthetic rate for up to ten years, analyzed annually.
The authority outlined in the FS Bill would only apply to contracts which are in scope of EU’s Benchmark Regulation (BMR). Certain cash products, such as loan agreements, are not subject to BMR and parties should be aware of any mismatches in methodologies for determining fallback rates.
Some LIBOR tenors extended to 2023
Second, in the U.S., the administrator of LIBOR has issued a statement that certain USD LIBOR tenors may continue to be published until June 30, 2023 (here). This statement was followed by statements of support from the US Banking Regulators (here). This extension only pertains to certain USD LIBOR indices; the publication of all sterling, euro, Swiss franc and yen LIBOR is expected to cease by the end of 2021. The FCA has indicated an intention to coordinate an orderly wind down with US authorities, but any decisions related to the transition away from LIBOR must also track with their policy statement.
These proposals have yet to be finalized and the relevant regulatory bodies continue to consult with market participants for feedback before issuing final determinations.
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Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0009
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