LIBOR cessation – with just 3 weeks to go, are you ready?
Last week the FCA submitted their final LIBOR publications before the all-encompassing deadline for cessation at the end of 2021.
During a speech, Edwin Schooling Latter, Director of Markets and Wholesale Policy and Wholesale Supervision, outlined the last steps firms must take as the end of the year approaches, when most LIBOR rates will cease to be calculated.
LIBOR is now calculated using submissions from a group of institutions. Most of these submissions are based on estimates of the interest rate at which banks may borrow money in wholesale markets on unsecured conditions. The transition from LIBOR to risk-free rates, which are based on actual transactions rather than predictions, has been a global initiative led by the FCA and the Bank of England, in collaboration with the wider industry and international regulators.
24 of the 35 LIBOR parameters, which pertain to specific currencies and time periods, will be unavailable as of January 1, 2022. Schooling Latter also discussed in his speech the additional activities the FCA anticipate firms to take for the LIBOR settings that will continue, for a time limited period, after the end of the year.
Six sterling and yen LIBOR settings will be maintained until 2022 but will be computed using risk-free rates rather than panel bank submissions. This is referred to as ‘synthetic’ LIBOR.
New uses of these synthetic LIBOR rates will be prohibited, but the FCA has decided to allow their use in existing historic contracts, except for cleared derivatives. Before the end of 2021, cleared sterling and yen LIBOR derivatives will be converted to risk-free rates.
In accordance with the draught notices that were issued by the FCA earlier this year, they intend to publish Notices on January 1st requiring LIBOR’s administrator to change the way these six LIBOR parameters are computed and to begin permitting their use in older contracts.
Until mid-2023, five US dollar LIBOR settings will be generated using panel bank responses. With a few exceptions, the FCA has decided to stop using US dollar LIBOR after the end of 2021. This is in line with supervisory recommendations issued by US authorities and backed up by the Financial Stability Board and the International Organization for Standardization.
FCA. (2021). FCA issues final messages on LIBOR before end-2021. [online] Available at: https://www.fca.org.uk/news/news-stories/final-messages-libor-end-2021 [Accessed 13 Dec. 2021].