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FCA confirms rules for legacy use of synthetic libor rates

Although 5 US dollar libor settings will continue to be calculated by panel bank submission until end-June 2023, the FCA has also confirmed that the use of US dollar libor will not be allowed in most new contracts written after 31 December 2021

The FCA has confirmed it will allow the temporary use of ‘synthetic’ sterling and yen libor rates in all legacy libor contracts, other than cleared derivatives, that have not been changed at or ahead of end-31 December 2021.

It revealed these synthetic rates will not be available for use in any new contracts.

Libor is currently based on submissions provided by a panel of banks, with the submissions mostly based on estimates intended to reflect the interest rate at which banks could borrow money on unsecured terms in wholesale markets.

According to the FCA, many contracts that use libor have already been switched to new “risk-free” overnight interest rate benchmarks or will do so at end-2021.

However the firm said there is a “risk of disruption” to markets and consumers if interest payments in libor loans, mortgages, bonds, and other contracts that have not switched by end-2021, cannot be calculated.

As a result, The FCA is requiring the publication of one, three and six-month libor rates for sterling and Japanese yen on a synthetic basis until the end of 2022, to allow more time to complete transition.

The move to end the use of US dollar LIBOR in new contracts is supported by regulators in the US and around the world.

Edwin Latter, director of markets and wholesale policy, said: “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.

“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.”

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