UK to Grant FCA Additional Powers to Facilitate LIBOR Retirement

Source: Regulation Asia Editors, Regulation Asia 2020-06-24

Legislative amendments will empower the FCA to prohibit or limit the use of LIBOR, or to direct a change in its methodology, to address the issue of ‘tough legacy’ contracts.

The UK government has announced it will amend the existing Benchmarks Regulation to ensure the FCA (Financial Conduct Authority) has sufficient powers to manage an orderly transition from LIBOR by end-2021.

“It is in the interests of financial markets and their customers that the pool of contracts referencing LIBOR is shrunk to an irreducible core ahead of LIBOR’s expected cessation, leaving behind only those contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended,” Chancellor of the Exchequer Rishi Sunak said in an official statement.

“The government recognises, however, that legislative steps could help deal with this narrow pool of ‘tough legacy’ contracts that cannot transition from LIBOR.”

The amendments seek to empower the FCA to protect consumers and ensure market integrity by enabling it to manage and direct any wind-down period prior to LIBOR’s cessation, including by directing a methodology change for a critical benchmark, or by prohibiting or limiting the use of an individual critical benchmark where its representativeness will not be restored.

The measures will be taken forward in the forthcoming Financial Services Bill, following which the FCA will engage with industry and global counterparts and, where appropriate, issue policy statements on how it plans to use the new powers prior to execution.

“The FCA may consider, among other factors, international impacts before exercising its new powers, given LIBOR’s global usage,” Sunak said.

The announcement puts to bed speculation that the UK could delay the end-2021 deadline due to Covid-19 disruptions, which have slowed transition efforts in some jurisdictions.

The FCA welcomed the Sunak’s statement, saying the legislative changes could help to ensure an orderly wind-down of LIBOR.

It would also help deal with ‘tough legacy’ contracts that cannot transition from LIBOR by stabilising certain rates during a wind-down period so that limited use in legacy contracts could continue.

“Market participants should continue to focus on active transition, as this is the only way for parties to have certainty about contractual continuity and control over their contractual terms when LIBOR ceases or is no longer representative,” the FCA said, urging for continued efforts to reduce the stock of outstanding LIBOR contracts.

Banking industry body UK Finance said the new powers will also help encourage a smoother, quicker and more efficient transition for contracts that can be amended.

“The government’s intention to legislate for the transition of ‘tough legacy’ LIBOR contracts provides welcome clarity, removing uncertainty for both customers and lenders and playing a key role in ensuring fair and consistent customer outcomes,” UK Finance Managing Director of Commercial Finance Stephen Pegge said in a statement.

FCA

LIBOR

UK to Grant FCA Additional Powers to Facilitate LIBOR Retirement

Subscribe to Our Newsletter!

Subscribe to Our Newsletter!