On the go: The Financial Conduct Authority has announced that some key Libor panels will publish ‘synthetic’ rates to safeguard an “orderly wind-down” of the benchmark interest rates.
The city watchdog announced on Wednesday that the ‘synthetic’ rates will apply to the six remaining sterling and Japanese yen Libor settings and will only be available for use in some legacy contracts.
The FCA has told the Libor benchmark administrator to publish these settings, based on term risk-free rates, for the duration of 2022.
Some 24 settings set by the ICE Benchmark Administration, covering the sterling, Japanese yen, Swiss franc and euro Libor panels, are set to cease on December 31.
The five US dollar settings are expected to continue to be published based on the current 'panel bank' Libor methodology, and on a representative basis, until the end of June 2023.
Under the new methodology, the six sterling and Japanese yen Libor settings will become permanently unrepresentative of their underlying markets from January 1 2022.
Subsequently, these settings will become Article 23A benchmarks under the Benchmarks Regulation, which grants the FCA the ability to designate them as a critical benchmark.
The first non-representative publication under their new methodology will be on January 4 2022.
In a statement, the FCA said that a “significant majority of respondents” to the regulator’s consultation proposals supported the approach.
The regulator will publish a detailed feedback statement on responses received. Yet concerns around the impact of the Libor closure — particularly on defined benefit schemes — have been voiced by the industry.
In February, Pensions Expert reported on the “very large number of investors” who would be impacted by the end of the interbank rate. Schemes typically use Libor for different asset class investments and for benchmarking.
Industry experts raised concerns around the impact on derisking arrangements, fiduciary management and investment agreements, and funding agreements, amongst other factors.
For pension schemes, the implementation of the ‘synthetic rates’ may influence how liabilities are hedged.
Edwin Schooling Latter, director of markets and wholesale policy at the FCA, said: “Market participants have made huge progress in moving away from Libor. Today’s publications confirm some important details of how Libor will now be brought to an end.
“New use of sterling, Japanese yen, Swiss franc, euro, and — with only limited exceptions, US dollar — Libor will have to stop at end-2021.
“The publication of a ‘synthetic’ rate for some sterling and Japanese yen Libor settings for a limited period will give market participants a bit more time to complete transition of legacy contracts.”
“We encourage firms to use that time well,” he added.
