Shearman & Sterling LLP | FinReg | UK Government Consults on Legal Safe Harbor for Legacy Contracts to Support the Wind-Down of a Critical Benchmark 
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  • UK Government Consults on Legal Safe Harbor for Legacy Contracts to Support the Wind-Down of a Critical Benchmark 
    02/15/2021
    HM Treasury has opened a consultation on supporting the wind-down of critical benchmarks. The Financial Services Bill includes potential enhanced powers for the Financial Conduct Authority to wind-down a critical benchmark and deal with tough legacy contracts. The increased powers are being introduced in response to concerns and uncertainty about the transition from LIBOR to risk free rates by the end of 2021. The Financial Services Bill includes provisions granting the FCA the power to designate a critical benchmark (such as LIBOR) as an "Article 23A" benchmark if its representativeness is lost or at risk, unless representativeness can reasonably be restored and maintained and there are good reasons to do so. This designation would mean that use of the benchmark by supervised entities in relation to particular types of contracts would be prohibited, subject to certain exemptions. Once the FCA has designated a benchmark as an "Article 23A" benchmark, it would have powers to impose requirements on the way in which the benchmark is determined, the rules of the benchmark and the benchmark's code of conduct if it is based on submissions from contributors. The FCA consulted late in 2020 on its proposed approach to using the new powers and further consultations are expected in 2021. Following the introduction of the Financial Services Bill, there have been calls for the introduction of a supplementary legal ‘safe harbor’ for relevant legacy contracts to reduce the potential risk of contractual uncertainty as well as litigation. It has been suggested that neither the designation of a benchmark nor the subsequent imposition of requirements should, among other things, have the effect of:  (i) discharging of performance of any contract; (ii) giving any party the right to unilaterally terminate or suspend performance of any contract; and (iii) amending, modifying of novating a contract.

    HM Treasury is seeking views on whether it is necessary to introduce such a safe harbor, and if so, the scope of it. Feedback is also sought on legal immunity for a critical benchmark administrator. HM Treasury's consultation closes on March 15, 2021.

    View the consultation paper on supporting the wind-down of critical benchmarks.

    View details of the FCA's consultations on its new benchmark powers.

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