FCA extends US dollar Libor to 2024 on synthetic basis

The regulator confirms plans to publish synthetic one, three and six-month US dollar Libor rates until September 2024, while sterling Libor will continue until March 2024, extending the original deadlines to assist with cash contract transitions.  

The UK’s Financial Conduct Authority (FCA) has announced proposals requiring the Libor administrator IBA to continue publishing synthetic US dollar and sterling Libor rates until September 2024 and March 2024, respectively, with the final Libor publication occurring at the end of September 2024. The decision follows feedback from the industry that a number of US dollar cash contracts, particularly outside the US, would benefit from a continued publication.  

The US dollar Libor was originally due to cease in June 2023, but the FCA has used its powers under the Benchmarks Regulation (BMR) to temporarily extend publication under an unrepresentative synthetic methodology in order to assist with legacy transitions.

“While we consider synthetic LIBOR a fair and reasonable approximation of what LIBOR might have been, it will no longer be representative for the purposes of the BMR. It is not for use in new contracts. It is intended for use in certain legacy contracts only,” emphasised the regulator.  

Many US dollar LIBOR contracts have provisions which trigger their conversion to alternative rates (eg risk-free rates) when publication on a representative basis ends after 30 June 2023. Others, particularly many contracts under US law, are covered by legislative provisions that will enable their conversion to appropriate alternative rates at this point. However, the FCA noted that responses to a June consultation highlighted a significant number of contracts in cash markets, particularly outside the US, that would benefit from a period of publication of US dollar LIBOR on a synthetic basis. 

The three synthetic yen Libor settings will cease at the end of 2022, as planned, while the one and six-month synthetic sterling Libor rates will end in March 2023. The overnight and 12-month sterling rates will cease in June 2023, while the three-month sterling Libor will end in March 2024 and the one, three and six-month synthetic US dollar Libor settings will end in September 2024.  

The FCA is currently also seeking views on proposals to use the CME Term SOFR plus the relevant ISDA fixed spread adjustment as the methodology for a synthetic US dollar Libor, and whether or not to permit all legacy contracts (other than cleared derivatives) to use the synthetic rate. A final decision is expected to be made in late Q1/early Q2 next year.  

“Any synthetic LIBOR settings are only a bridge to appropriate alternative risk-free rates, not a permanent solution. As such, market participants should continue to prioritise active transition and focus on converting their legacy contracts to risk-free rates as soon as possible,” said the regulator.  

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