FCA Confirms Dates for Cessation of Panel Submissions For All LIBOR Settings
2021 has begun much in the same vein as 2020 both started and, in circular fashion, ended: impeachments, Brexit, pandemics, lockdowns, working from home and the continuing question of when exactly everyone will get a COVID-19 vaccination.
In addition to all these important issues, there has been a consistent message from global regulators about preparations for the transition away from LIBOR. As we approach the end of the first quarter of 2021, the FCA have provided market participants with some much-needed clarity on these fast-approaching deadlines. With uncertainty lifted, we expect that communications from regulators will become more frequent and, quite possibly, even more forceful.
Setting the context
Rewinding slightly, it is worth recapping where things stand in the overall LIBOR transition process, as there were a few communications towards the end of 2020 that had the potential to slightly alter the timetable.
The publication of all LIBOR Tenors will cease on 31 December 2021… right?
Not quite…at the start of December, ICE Benchmark Administration (“IBA”), the group responsible for the administration of LIBOR as a benchmark, published a consultation. This addressed the ceasing of publication of certain USD LIBOR Tenors at the end of 2021 but the continuation of others until June 2023.
The consultation detailed the intention for the publication of the one-week and two-month LIBOR to end on 31 December 2021, but for one-, three-, six- and twelve-month LIBOR tenors to continue publication for a further 18 months. This announcement marked a significant departure from the previous messaging of a unified termination at the end of 2021.
The consultation closed on 25 January 2021. The IBA have stated that they will publish a summary of feedback responses shortly, as well as sharing the full results with the FCA.
The FCA’s announcement on 5 March 2021 has now brought clarity and, we assume finality on this issue - Panel Bank submissions for all LIBOR rates will cease in line with the timetable detailed in the IBA consultation.
What are the implications?
All LIBOR Settings will either cease to be provided by the Administrator, or no longer be representative:
- Immediately after 31 December 2021, in the case of all sterling, euro, Swiss franc and Japanese Yen settings, and the one-week and two-month US dollar settings; and
- Immediately after 30 June 2023, in the case of the remaining US dollar settings
As highlighted in a speech by Edwin Schooling Latter, Direct Markets and Wholesale Policy on the 26 January, the FCA “might consider it desirable and feasible to require continued publication of any LIBOR currency tenors on the basis of a changed methodology.” This “changed methodology” refers to new Risk-Free Rates (e.g., SONIA) combined with a spread that is identical to the spread in the ISDA fallbacks and is often called “synthetic LIBOR”. The authorities acknowledge that not all contracts can be easily transitioned from LIBOR and, in order to reduce and avoid disruption around these contracts, a further consultation will be launched in Q2 2021. This will consider the new powers proposed for the FCA under the Benchmarks Regulation (BMR) to continue and require publication of some sterling and Japanese Yen setting, on a synthetic basis, for up to a year following cessation.
Precisely which legacy contracts will be permitted to use these “synthetic” rates will also be covered in a Q2 consultation.
How is the financial sector positioned in relation to these recent developments?
Just prior to the announcement of the IBA consultation in October 2020, the Financial Stability Board (a group of international regulators and central banks covering most, if not all financial markets) issued a roadmap for the global transition for LIBOR. This roadmap attempts to set out a timetable of actions for financial and non-financial sector firms to take in order to ensure a smooth LIBOR transition.
What is perhaps more noteworthy, in the accompanying progress report, is the overriding message that regulators viewed the financial sector as a whole, as being less than fully aware of the risks associated with the transition from LIBOR or adequately prepared. The report in fact notes “…much new lending is still linked to LIBOR, increasing the stock of contracts affected by its eventual discontinuation” and that “… awareness of these risk was lower in non-LIBOR jurisdictions, despite significant exposures arising from the global use of USD LIBOR in particular.”
This somewhat contradicted the tone of the FCA speech of 26 January , which championed the work done by market participants in utilising the ISDA fallback provisions as they became effective, with over 12,500 firms having signed the protocols at that point. Using EMIR data, the FCA believe that approximately £4 trillion worth of uncleared interest swaps referencing sterling LIBOR exist. What’s more, the estimate for all LIBOR-referencing contracts is $260T, 80% of which are cleared interest rate swaps and exchange-traded derivatives. Of the £4T sterling-LIBOR uncleared interest rate swaps, 85% have effective fall-backs in place due to both sides of the trade adhering to the fallback language and 99.7% have at least one-sided adherence.
So does 2021 mark the final push?
With the announcement on 5 March, the LIBOR transition drum continues its beat at a steady and incessant tempo. New roadmaps for 2021 have been issued by the RFR working group breaking down milestones for Derivatives, Bonds and Securitisations and finally Loans.
Across all these classes, the timelines call for an end to all new issuance referencing GBP LIBOR with a maturity post 2021 and a complete identification of all legacy LIBOR contracts expiring after 2021 by the end of Q1. Active conversion from LIBOR is signposted through Q2 and Q3 with the final quarter of 2021 simply being marked as “Be fully prepared for the end of GBP LIBOR”.
With clarity being provided regarding the end dates for the LIBOR transition, firms should approach 2021 as being the end of LIBOR, something clearly reiterated by both the FCA and Bank of England:
FCA CEO, Nikhil Rathi:“Today’s announcements provide certainty on when the LIBOR panels will end.” and “Market participants must now complete their transition plans”
Bank of England Governor, Andrew Bailey: “With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021”.
The markets have been warned!
How We Help
As the clock counts down, assessing and identifying a firm’s exposure to LIBOR, across both the investment and corporate governance areas can seem daunting. ACA can assist you in devising your LIBOR transition plans, assessing and reviewing your firm’s reliance and usage of LIBOR, or performing a gap analysis review of your transition work to date. Complete this form or call +44 (0) 20 7042 0500 to connect with us.