Shearman & Sterling LLP | FinReg | UK Regulator Confirms Legacy Use of Synthetic LIBOR
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  • UK Regulator Confirms Legacy Use of Synthetic LIBOR

    The U.K. Financial Conduct Authority has confirmed that the use of  certain synthetic sterling and yen LIBOR settings will be permitted until the end of 2022 for legacy LIBOR-referencing contracts, other than cleared derivatives, that have not been changed or updated ahead of December 31, 2021. The synthetic rates cannot be used in any new contracts.

    The synthetic rate will be published by ICE Benchmark Administration for six LIBOR settings (1-month, 3-month and 6-month sterling and Japanese yen LIBOR). The methodology for calculating the synthetic rate will be as proposed in the FCA's September 2021 consultation, which was confirmed in the FCA's Feedback Statement, also published today. The synthetic methodology will be based on the forward-looking term risk-free rates plus ISDA spread adjustments for the ISDA fallbacks for relevant LIBOR settings. The FCA will publish a final form of the Notice obliging ICE Benchmark Administration to publish the synthetic rate on January 1, 2022, which will take immediate effect. The synthetic rate settings will not be representative of the underlying market or economic reality that the rate is or was intended to represent.

    All other sterling and Japanese yen LIBOR settings (other than those listed above), as well as all Euro, Swiss franc and 1-week and 2-month U.S. dollar settings will cease after December 31, 2021. Users of these settings are expected to prepare for this cessation. Users of 1-, 3- and 6-month sterling and Japanese yen LIBOR are discouraged from relying on unrepresentative benchmark rates.

    Five US dollar LIBOR settings (overnight, 1-month, 3-month, 6-month and 12-month U.S. dollar LIBOR) will continue to be calculated by panel submission until end-June 2023. However, the FCA has also published a notice prohibiting the use of such settings by U.K. supervised entities in new regulated financial instruments and contracts and for new investment fund performance measurement from January 1, 2022, subject to exemptions, such as for market making in support of client activity related to U.S. dollar LIBOR transactions and transactions that reduce or hedge U.S. dollar LIBOR exposure in contracts, in each case entered into before January 1, 2022. 

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