United States: LIBOR Transition: Feedback from the FCA Consultation on Synthetic LIBOR

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Following our recent blog post on Synthetic LIBOR, the Financial Conduct Authority (the “FCA”) released its commentary statement on its consultation regarding the traditional use of sterling LIBOR at 1, 3 and 6 months on. as of January 1, 2022. Comments consisted of 36 responses from market participants, with the majority of respondents agreeing with all aspects of the FCA’s proposals. The FCA has confirmed that it will allow legacy use of synthetic sterling LIBOR by supervised entities, other than cleared derivatives.

The FCA has confirmed that the synthetic one, three and six month sterling LIBOR will be calculated as the sum of the applicable SONIA one, three or six month benchmark rates provided by IBA and the applicable fixed spread adjustment as part of the downturn. ISDA IBOR for one, three or six months Sterling LIBOR, which is published for the purposes of the ISDA IBOR Rescue Supplement and Protocol. IBA will be required to continue to publish synthetic sterling LIBOR for all business days in London, except public holidays in London.

It should be noted that some market participants questioned the use of the forward-looking term RFR as a component of synthetic LIBOR, suggesting the use of “late” RFRs instead in order to align with the solutions of ISDA relief. The FCA’s response to this suggestion was that “overdue” RFRs are not suitable for contracts that require the interest rate to be identified in advance, and as such, contracts cannot be changed from time to time. Realistically to operate using “overdue” RFRs, the use of such rates in the calculation of synthetic LIBOR could potentially disrupt the market.

Duane Morris LIBOR Transition Team: Roger S. Chari, President, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo and Natalie A. Stewart.

Disclaimer: This alert has been prepared and posted for informational purposes only and is not offered, nor should it be construed as legal advice. For more information, please consult the full warning.

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