UK passes LIBOR transition legislation

The new legislation sets out the final pieces of the UK’s new framework of rules, also known as the UK’s ‘tough legacy’ regime. It deems references to certain LIBOR settings in existing UK law-governed contracts to be references to the new synthetic LIBOR rates that are being published for sterling and yen from the start of 2022.

The UK government hopes the rules will minimise disruption for contracts referencing one, three and six-month sterling and yen LIBOR for which the counterparties have not managed to agree to move to a replacement reference rate before LIBOR ceases at the end of this year.

Separately, the Financial Conduct Authority (FCA) has also finalised its position on compelling the LIBOR administrator, ICE Benchmark Administration Limited, to publish LIBOR on a synthetic basis for one, three, and six-month sterling and yen for 2022.

The FCA said it would not compel publication of yen synthetic LIBOR after the end of 2022, and would not guarantee to publish sterling synthetic LIBOR at that point either. The regulator set out that steps it might take from the end of 2022, including reducing the number of sterling synthetic LIBOR settings.

The FCA said it would not compel publication of yen synthetic LIBOR after the end of 2022, and would not guarantee to publish sterling synthetic LIBOR at that point either. The regulator set out that steps it might take from the end of 2022, including reducing the number of sterling synthetic LIBOR settings.

The FCA told the industry earlier this month: “The case for 3-month sterling LIBOR was stronger than for 1-month and 6-month. When outstanding contracts that still reference a particular LIBOR setting have reduced significantly, it may no longer be proportionate for the FCA to require continued publication of that setting on a synthetic basis.”

“All the synthetic rates will cease in due course, and none will be continued simply for the convenience of those who could take action to convert, but have not bothered to do so,” it added.

Hugo Cassidy, financial services expert at Pinsent Masons, said regulators are keen to make sure that market participants “do not view synthetic sterling LIBOR as a long term fix”.

“Issuing warnings that the number of published synthetic LIBOR settings may reduce from the current one, three and six-month sterling synthetic LIBOR position is just another way the regulator is making it clear that market participants should not get too comfortable using synthetic LIBOR,” he said.

“As the regulators keep restating, market participants should endeavour to move away from the synthetic LIBOR settings where possible,” Cassidy said.

Meherzad Bilimoria, financial services expert at Pinsent Masons, added that market participants will be wary of relying on these measures for any longer than necessary.

“Lenders and borrowers will likely take the warnings of regulators seriously. None of the market participants that we are speaking to want to be worrying about transitioning contracts away from synthetic LIBOR 12 months from now,” he said.

“Synthetic LIBOR is a helpful bridge to a post-LIBOR world for tough legacy contracts, but has an inherently short lifespan. As the pool of tough legacy contracts continues to shrink, so do the chances of a further extension of time to the publication end dates for synthetic LIBOR,” Bilimoria said.

“Contracts which reference synthetic LIBOR after 2022 face an uncertain future,” he added.

All LIBOR settings cease at the end of this year for euro and Swiss franc LIBOR and no synthetic rates will be published under the UK tough legacy regime for these currencies.

US dollar LIBOR will continue from the end of 2021, although one week and two-month US dollar LIBOR settings will not.

Despite this, regulators have made clear that – with limited exceptions - market participants should not enter into new arrangements which reference US dollar LIBOR.