On May 20, 2021, the UK Financial Conduct Authority (FCA) published a consultation on its proposed policy framework for exercising two of its new powers under the Benchmarks Regulation, as introduced by the UK Financial Services Act 2021 (UK BMR). These powers are designed to facilitate an orderly wind down of critical benchmarks such as LIBOR, and were discussed in more detail in our earlier blog post.

Under the UK BMR, the FCA will have new powers to compel the continued publication of LIBOR using a changed methodology (a Synthetic LIBOR). When a Synthetic LIBOR rate is implemented, the FCA will only permit its use in ‘tough legacy’ contracts, where amendment of the contract is not possible. On March 5, 2021, the FCA released its framework policy for how it will exercise its new powers to require continued publication of critical benchmarks using a changed methodology. This new consultation sets out which factors the FCA deems relevant in deciding what legacy use of a permanently non-representative benchmark it will permit.

The consultation also sets out the FCA’s proposed approach to using its power to prohibit new usage of a critical benchmark which is ending, such as LIBOR. This power is expected to be particularly relevant for USD LIBOR, for which most settings will continue until mid-2023. The FCA has reiterated its support for U.S. authorities’ intention to cease all new usage of USD LIBOR by the end of 2021, despite the fact that numerous USD LIBOR tenors will continue until end-June 2023.

The FCA intends to finalise these policies after reviewing the feedback received on its consultations. Following this, the FCA intends to consult in Q3 2021 on precisely what legacy use will be allowed for synthetic LIBOR, and how it can restrict new use of LIBOR rates. These decisions are expected to be finalised in Q4 2021.

The FCA has also reminded market participants that the use of a synthetic LIBOR will not be a permanent solution, and has urged them to continue their efforts to amend their contracts to transition them to risk-free rates.

Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.