Intercontinental Exchange, Inc. (NYSE:ICE), a leading global provider of data, technology, and market infrastructure, today noted that the UK Financial Conduct Authority (FCA) will compel ICE Benchmark Administration Limited (IBA), the authorized and regulated administrator of LIBOR®, to publish the 1-, 3- and 6-Month sterling and Japanese yen LIBOR settings under a changed, unrepresentative, “synthetic” methodology for a limited time period after the end of 2021.
On March 5, 2021, the FCA announced that all Swiss franc and euro LIBOR settings, the 1 Week and 2 Month U.S. dollar LIBOR settings, and the Overnight/Spot Next, 1 Week, 2-Month and 12-Month sterling and Japanese yen LIBOR settings will cease immediately after December 31, 2021. The FCA also announced that it would consult on using its anticipated new and enhanced legal powers under the UK Benchmarks Regulation (BMR) to require IBA to continue the publication of the 1-, 3- and 6-Month sterling and Japanese yen LIBOR settings after December 31, 2021 under a changed, “synthetic” methodology in order to reduce disruption and support parties to legacy contracts, noting that any settings published under a “synthetic” methodology would no longer be representative of the underlying market or economic reality the setting is intended to measure, including for the purposes of the BMR. The FCA’s new powers were provided as amendments to the BMR in the Financial Services Act 2021. The FCA has stated that these six LIBOR settings will cease at year-end 2021 unless it uses its powers to compel their publication on a “synthetic” basis.
Today, the FCA announced that, following its recent consultation and to help ensure an orderly wind down of the 1-, 3- and 6-Month sterling and Japanese yen LIBOR settings, it will compel IBA to publish these six LIBOR settings under a changed, unrepresentative, “synthetic” methodology for the duration of 2022.
The FCA announced that it has confirmed the changed methodology that it will require IBA to use to determine the “synthetic” settings (following the FCA’s consultation proposals) as:
- for 1-, 3- and 6-Month sterling LIBOR, the relevant ICE Term SONIA Reference Rate provided by IBA, and for 1-, 3- and 6-Month Japanese yen LIBOR, the Tokyo Term Risk Free Rates (TORF) provided by QUICK Benchmarks Inc. (adjusted to be on a 360 day count basis); plus
- the respective ISDA fixed spread adjustment (that is published for the purpose of ISDA’s IBOR Fallbacks Supplement and Protocol) for each of these six LIBOR settings.
The FCA has notified IBA that it has designated these six LIBOR settings as “Article 23A benchmarks” with effect from January 1, 2022, which it must do in order to enable it to require these changes. The FCA also noted that the first non-representative publication of these six “synthetic” LIBOR settings under the changed, unrepresentative, “synthetic” methodology will be on January 4, 2022.
The FCA announced that users of LIBOR should continue to focus on active transition rather than relying on “synthetic” LIBOR, and that “synthetic” sterling and Japanese yen LIBOR settings will not be published indefinitely. The FCA is able to compel the publication of a ceasing benchmark for 12 months, and must review its decision to compel publication by the end of this period. The FCA may, where necessary, extend the period of compulsion by up to 12 months, with the maximum period of compulsion being 10 years. The FCA has stated that it does not intend to renew the requirement for publication of “synthetic” Japanese yen LIBOR settings to continue, and that publication will therefore cease at year-end 2022.
Under the relevant BMR provisions, new use of these six “synthetic” LIBOR settings by UK-supervised entities in regulated financial instruments will be prohibited, and continued legacy use in equivalent circumstances by UK-supervised entities will also be subject to the FCA using its powers to permit such use.
The FCA also confirmed that it expects that the Overnight and the 1-, 3-, 6- and 12-Month U.S. dollar LIBOR settings will continue to be published on a representative basis, using panel bank submissions under the current “panel bank” LIBOR methodology, until the end of June 2023.
