ISDA has confirmed that the FCA’s announcement constitutes an index cessation event and that the spread adjustment to be used in fallbacks has been fixed.
The UK FCA (Financial Conduct Authority) on Friday (5 March) issued a statement confirming that all LIBOR settings will either cease to be provided by any administrator or no longer be representative, as follows:
- All GBP, EUR, CHF and JPY LIBOR settings, and the 1-week and 2-month USD LIBOR settings, will cease immediately following publication on 31 December 2021
- The overnight and 1-, 3-, 6- and 12-month USD LIBOR settings will cease immediately following publication on 30 June 2023
Further, the FCA has confirmed that it does not expect any LIBOR settings to become unrepresentative before these intended cessation dates, given the undertakings received from the panel banks.
“Today’s announcements provide certainty on when the LIBOR panels will end,” said FCA chief Nikhil Rathi. “Publication of most of the LIBOR benchmarks will cease at the same time as the panels end. Market participants must now complete their transition plans.”
The FCA’s statement follows an IBA (ICE Benchmark Administration) consultation in December 2020, which sought feedback on its intention to cease the publication of the relevant LIBOR settings on the above-mentioned dates.
In a consultation feedback statement published on Friday, IBA said it will not be possible to publish the relevant LIBOR settings on a representative basis in the absence of the FCA’s intervention to compel continued panel bank contributions to LIBOR.
“As a result of IBA not having access to input data necessary to calculate LIBOR settings on a representative basis beyond the dates specified above for such settings, IBA has to cease the publication of the relevant LIBOR settings on such dates,” IBA said.
The US ARRC (Alternative Reference Rates Committee) has issued a statement welcoming the FCA’s announcement, saying it lines up with US supervisory guidance about ending new USD LIBOR issuances this year and that it should accelerate market participants’ transition efforts, while also providing further time for many legacy contracts to wind down.
Index cessation event
ISDA has separately confirmed that the FCA’s announcement constitutes an index cessation event for all 35 settings in the various LIBOR currencies. As such, the spread adjustment (published by Bloomberg) to be used in IBOR fallbacks has been fixed as of 5 March 2021.
Going forward, the fallback rate calculated daily will use fixed spread adjustments, providing clarity on the future terms of derivative contracts which now incorporate these fallbacks. Bloomberg has published a technical notice on the fixing of the spread adjustment, available here.
ISDA has also published new guidance on how the IBOR Fallbacks Protocol and Supplement (effective from 25 January) will apply in light of the FCA’s announcement, covering the five LIBOR currencies as well as Singapore’s SOR and Thailand’s THBFIX – which both use LIBOR as inputs in their calculation.
The guidance states that index cessation will occur for all GBP, EUR, CHF and JPY LIBOR settings, and the USD LIBOR 1-week and 2-month settings, on the first London Banking Day on or after 1 January 2022.
Index cessation for all USD LIBOR settings will occur on the first London Banking Day on or after 1 July 2023, where the 1-week and 2-month USD LIBOR tenors will be determined by interpolating between the next longer tenor and next shorter tenor after December 2021.
Given that USD LIBOR is a component in the calculation of SOR and THBFIX, the guidance says Fallback Rate (SOR) and Fallback Rate (THBFIX) will apply instead of SOR or THBFIX, respectively, on the first London Banking Day on or after 30 June 2023.
Following the cessation dates, the FCA may exercise proposed new powers included in the current Financial Services Bill to require IBA to continue publishing LIBOR settings using a changed methodology, to address difficulties amending ‘tough legacy’ LIBOR contracts.
In new policy documents issued following November consultations on its proposed approach to using the new powers, the FCA says it intends to propose a methodology for this so-called ‘synthetic rate’ – to be calculated using a forward-looking term RFR plus a 5-year historic median of the spread between LIBOR and the relevant RFR, in alignment with the spreads used in ISDA’s IBOR fallbacks.
In Q2, the FCA will consult on using the proposed new powers to require the continued publication, on a ‘synthetic’ basis, of the 1-, 3- and 6-month GBP and JPY LIBOR settings beyond end-2021. The length of time for which publication of GBP LIBOR may continue on a synthetic basis has not been specified. For JPY LIBOR, the proposed duration is one year.
The FCA will also continue to consider the case for using the powers to require the continued publication of the 1-, 3- and 6-month USD LIBOR settings past June-2023.
“Any ‘synthetic’ LIBOR will no longer be representative for the purposes of the BMR [Benchmarks Regulation] and is not for use in new contracts,” the FCA said. “It is intended for use in tough legacy contracts only.”
The FCA does not intend to use the proposed new powers to require the continued publication of any EUR or CHF LIBOR settings, or the overnight, 1-week, 2-month and 12-month LIBOR settings in any other currency, beyond the intended cessation dates.
To learn more about transition challenges and how to address them, register for this webinar, to be jointly hosted by Regulation Asia and Bloomberg on 13 April 2021.