FCA consults on new benchmarks powers

ICE Benchmark Administration (IBA), the FCA-regulated and authorised administrator of LIBOR, has today announced that it will consult on its intention that the euro, sterling, Swiss franc and yen LIBOR panels would, subject to confirmation following IBA’s consultation, cease at end-2021. 

In this statement, we set out our potential approach to the use of proposed new powers under the Financial Services Bill to ensure an orderly wind down of LIBOR. 

Alongside this statement, FCA has published consultations about their proposed policy in relation to some of the new powers that would be granted to the FCA under the Benchmarks Regulation (BMR) as amended by the Financial Services Bill introduced into the UK Parliament on Oct 21. FCA has published these based on the assumption that the Bill is passed in its current form. 

The exercise of these powers would be subject to a decision by IBA to cease publication of LIBOR as the conclusion of its consultation. It would also be subject to the powers which have been proposed in the Financial Services Bill being enacted by Parliament, feedback to FCA's policy proposals on how they may use their powers, and their subsequent consultations on decisions to use those powers once the policy is finalised.

One of FCA's consultations proposes their policy in relation to how they would use the proposed new power to require continued publication of critical benchmarks on the basis of a changed methodology in certain circumstances. The other sets out their views on the circumstances in which those powers would potentially become relevant. At the conclusion of these consultations, they will set out their approach in published Statements of Policy.

Under the proposed policy, they would not envisage using their powers where critical benchmarks (such as LIBOR currency-tenor settings) are little used, where the contracts referencing the benchmark can practicably be amended by contractual counterparties without their intervention, or where using the powers would not be necessary to protect consumers or market integrity. Nor would they envisage using the powers where appropriate inputs, as described in the proposed policy, are not available. 

If FCA adopts and applies their proposed policy to the LIBOR settings, there would be, however, a case for using the proposed new powers to require a change to the LIBOR methodology where:

LIBOR currency-tenor settings are widely used in outstanding contracts and/or instruments that cannot practicably be transitioned away from the benchmark rate by actions or agreements by or between contract counterparties themselves (often known as ‘tough legacy’ contracts) and

using the powers would contribute to protecting consumers or preserving market integrity

Using the powers would be feasible under FCA's proposed policy if the preferred inputs to a new methodology of the types they have proposed are available to the LIBOR administrator. 

On the basis of the policy proposed and currently available evidence, it appears unlikely that the conditions and inputs for use of their powers to require continued publication of euro and Swiss franc LIBOR will exist at the time these panels are proposed to cease. 

Conversely, forward-looking SONIA term rates are available and tough legacy contracts exist in significant amounts in the sterling market. So, at least the most heavily used sterling currency-tenor settings would seem likely to meet these conditions when publication of GBP LIBOR on the basis of a representative panel is proposed to cease. 

In relation to yen LIBOR, they will continue to assess whether it might be necessary and feasible to use the proposed powers in the case of more heavily used yen settings as transition progresses. 

Although IBA has not yet set out specific proposals in relation to the USD LIBOR settings, this policy framework would also be relevant to USD LIBOR. 

Any decision to use the power to require a methodology change in respect of LIBOR settings will take into account evidence and views from market participants and our counterpart global authorities, and will be consulted upon in due course. While powers proposed under the Financial Services Bill can be used to assist the holders of legacy LIBOR contracts if the relevant conditions apply, they also include prohibitions on new use of the benchmark. The aim of these powers is not to enable FCA to restore the representativeness of LIBOR, but, subject to the various conditions and consultation processes described above, they could enable its continued publication under a new methodology to assist legacy contract holders. 

This statement should not be read as announcing that the LIBOR benchmark has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative for the purposes of language adopted by the International Swaps and Derivatives Association. 

Reprinted from FCA, the copyright all reserved by the original author.