The UK Financial Conduct Authority (FCA) today announced its decision on synthetic US dollar LIBOR.
In November 2022, the FCA consulted on proposals to require the continued publication of 1-, 3- and 6-month synthetic US dollar LIBOR after 30 June 2023 when the US dollar LIBOR panel is due to cease.
In line with that consultation, the FCA today said that it has decided to require LIBOR’s administrator, ICE Benchmark Administration Limited (IBA), to continue the publication of the 1-, 3- and 6-month US dollar LIBOR settings for a short period after 30 June 2023, using an unrepresentative ‘synthetic’ methodology (‘synthetic US dollar LIBOR’).
- How long synthetic US dollar LIBOR will be published for
The FCA intends that publication of the 1-, 3- and 6-month synthetic US dollar LIBOR settings will cease on 30 September 2024. The regulator will review its decision, in line with the requirements of the Benchmarks Regulation. However, unless unforeseen and material events were to happen, the FCA expects to follow the direction and timeline it has indicated.
Synthetic LIBOR is only a temporary bridge, and synthetic settings will not continue simply for the convenience of those who could have transitioned their contracts but have not done so.
- How synthetic US dollar LIBOR will be calculated
The FCA has decided to require IBA to calculate the 1-, 3- and 6-month synthetic US dollar LIBOR settings using the relevant CME Term SOFR Reference Rate plus the respective ISDA fixed spread adjustment.
- Legacy use of synthetic US dollar LIBOR
The regulator has decided to permit the use of the 1-, 3- and 6-month synthetic US dollar LIBOR settings in all legacy contracts except cleared derivatives.
- New use of synthetic US dollar LIBOR will not be permitted
On 1 January 2022, the FCA imposed restrictions on new use of US dollar LIBOR, with limited exemptions. From 1 July 2023, after the US dollar LIBOR panel ends, all new use of synthetic US dollar LIBOR will be prohibited under the Benchmarks Regulation. This will override the exemptions to the prohibition on new use that the FCA imposed, and consequently these exemptions will cease when the US dollar LIBOR panel ends. The synthetic settings are intended for use in legacy contracts only, to help ensure an orderly wind-down of LIBOR.
Since 1 January 2022, the FCA has required IBA to publish the 1-, 3- and 6-month sterling LIBOR settings using a ‘synthetic’ methodology.
The 1- and 6-month synthetic sterling LIBOR settings were published for the final time on 31 March 2023. These settings have now ceased permanently.
The FCA has been clear that the 3-month synthetic sterling LIBOR setting is expected to cease at the end of March 2024. Firms must continue their active transition efforts ahead of this date.
