UK finalising scope of LIBOR legacy regime

The FCA published a consultation paper on its proposals to allow the use of synthetic LIBOR from the end of the year, as well as guidance on what arrangements its legacy regime will apply to.

LIBOR, a measure of the average rate at which banks are willing to borrow certain funds, and which is used as a pricing mechanism for financial products, will cease to be published from the end of this year for euro, yen, sterling and Swiss franc settings, and for one-week and two-month US dollar settings.

The FCA is putting in place a set of rules providing for LIBOR to be published on a “synthetic” basis for one, three and six-month settings for sterling and yen and used on a legacy basis from 1 January 2022.

The regulator confirmed the methodology it would require LIBOR’s administrator to use for these synthetic rates, which will no longer be representative of their underlying markets.

The FCA said it would also prohibit the new use of overnight and one, three, six and 12-month US dollar LIBOR until these settings cease on 30 June 2023 for certain product types, and subject to certain exceptions.

Financial services expert Hugo Cassidy of Pinsent Masons, the law firm behind Out-Law, said the arrangements should give contracts within the scope of the regime and for which active transition has not been possible a transparent basis on which to calculate amounts payable.

“That said, market participants should not take this as an opportunity to take their foot off the pedal of LIBOR transition efforts. The UK regulators are urging market participants to stop using synthetic LIBOR wherever possible,” Cassidy said.

Cassidy said synthetic LIBOR was not intended to be a permanent measure. Yen synthetic LIBOR is expected to cease to be published at the end of 2022, while the continued publication of sterling synthetic LIBOR is subject to annual review by the regulators.

“It may be necessary to review arrangements which provide for interest periods of tenors or currencies not quoted by synthetic LIBOR to determine how interest would be calculated, for example through review of applicable fallbacks,” Cassidy said.