UK Government Statement Regarding LIBOR Transition and Intended Legislation

The UK Government announced on 23 June 2020, that it intends to legislate to ensure that the UK Financial Conduct Authority (FCA) has the appropriate regulatory powers to manage and direct any wind-down period prior to eventual LIBOR cessation.

The new regulatory powers would enable the FCA to direct a methodology change for LIBOR, in circumstances where the FCA has found that:

  • The benchmark is not representative of the market it seeks to measure;
  • The benchmark’s representativeness will not be restored; and
  • Action is necessary to protect consumers and/or to ensure market integrity and it is feasible for the administrator to change the methodology in the way required.

Existing law would also be strengthened to prohibit the use of LIBOR where its representativeness will not be restored, whilst giving the FCA the ability to specify limited continued use in legacy contracts.

The FCA has welcomed the announcement and proposes to publish statements of policy on its approach to potential use of these powers following further engagement with stakeholders in the UK and internationally. In particular, the FCA has also noted that it will seek stakeholder views on possible methodology changes based on the alternative risk free rates chosen in each of the LIBOR currency jurisdictions, and on the consensus already established in international and UK markets on a way of calculating an additional fixed credit spread that reflects the expected difference between LIBOR and risk-free interest rates.

Both the UK Government and the FCA advise that market participants should continue to focus the on active transition of legacy contracts on terms that they themselves agree with their counterparties, because this is the only way to have certainty as to contractual continuity and control over contractual terms. They caution that parties who rely on regulatory action, enabled by the proposed legislation, will not have control over the economic terms of that action. Moreover regulatory action may not be able to address all issues or be practicable in all circumstances, for example where a methodology change is not feasible, or would not protect consumers or market integrity.

LIBOR Waterfall Methodology Test Rates

     
     

ICE Bank Yield Index

ICE LIBOR Reports

IBA announced on 25 April, 2018 the intended transition of LIBOR panel banks to the Waterfall Methodology. The transition was expected to occur on a gradual basis. IBA did not publish any reports from 25 April, 2018 until the process of transitioning panel banks to the Waterfall Methodology was complete, which was announced on 1 April, 2019.


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