FCA to Introduce “Synthetic” Libor to Facilitate Lower Rates – Investment

The city watchdog said on Wednesday that the “synthetic” rates would apply to the six remaining parameters of Libor in pounds sterling and Japanese yen and would only be available for certain legacy contracts.

The FCA has asked the administrator of the benchmark Libor to publish these parameters, based on forward risk-free rates, for the term of 2022.

Some 24 metrics set by the ICE Benchmark Administration, covering the British Pound, Japanese Yen, Swiss Franc and Euro Libor panels, are expected to cease on December 31.

The five parameters in US dollars are expected to continue to be published based on the current Libor “panel bank” methodology and on a representative basis, until the end of June 2023.

Under the new methodology, the six parameters of Libor in sterling and Japanese yen will become permanently unrepresentative of their underlying markets from January 1, 2022.

Subsequently, these parameters will become Article 23A references under the References Regulation, which grants the FCA the option of designating them as a critical reference.

The first non-representative publication according to their new methodology will take place on January 4, 2022.

In a statement, the FCA said a “significant majority of respondents” to the regulator’s consultation proposals supported the approach.

The regulator will publish a detailed account of the responses received. Still, concerns about the impact of the Libor shutdown – particularly on defined benefit plans – have been voiced by the industry.

In February, Pensions Expert reported the “very large number of investors” who would be impacted by the end of the interbank rate. Programs typically use Libor for different asset classes and for benchmarking.

Industry experts have raised concerns about the impact on risk reduction agreements, fiduciary and investment management agreements and financing agreements, among other factors.

For pension plans, the implementation of “synthetic rates” can influence the way in which liabilities are covered.

Edwin Schooling Latter, Director of Markets and Wholesale Policy at FCA, said: “Market participants have made huge strides in moving away from Libor. Today’s posts confirm some important details about how Libor will now be ended.

“The new use of the British pound, the Japanese yen, the Swiss franc, the euro and – with a few exceptions, the US dollar – Libor will have to cease at the end of 2021.

“The publication of a ‘synthetic’ rate for certain parameters of the Libor in sterling and Japanese yen for a limited period will give market participants a little more time to complete the transition of existing contracts.”

“We encourage companies to use this time well,” he added.

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