FCA to Allow Temporary Use of Synthetic LIBOR Rates

The Financial Conduct Authority (FCA), the regulator of LIBOR, announced that it will allow the temporary use of 'synthetic' sterling and yen LIBOR rates in all legacy LIBOR contracts that have not been changed at or ahead of end-31 December 2021.

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The FCA announced on 29 September 2021 its decision on a fair, transparent and appropriate way of calculating synthetic LIBOR, approximating what LIBOR might have been in the future. The method is robust against manipulation and was supported by a large majority of respondents.

In the press release, the regulator highlighted that these synthetic rates will not be available for use in cleared derivatives or any new contracts.

Further, the British regulator mentioned that the use of US dollar LIBOR will not be allowed in most new contracts written after 31 December 2021, even though some US dollar settings will continue till 30 June 2023.

"Today's publications form some of the final building blocks in the transition from LIBOR, a global effort led by the FCA and the Bank of England in conjunction with industry and overseas regulators,"Edwin Schooling Latter, Director of Markets and Wholesale Policy said."But work should not stop here. While synthetic LIBOR reduces risk in the transition and provides a bridge to Risk-Free Rates like SONIA, it will not last indefinitely and contracts need to be moved away from LIBOR wherever possible."

Last month, European Commission has nominated the replacement rates for two interest rate benchmarks, the Swiss Franc London Interbank Offered Rate (CHF LIBOR) and the Euro Overnight Index Average (EONIA).