IBOR Transition: FCA announces future cessation and loss of representativeness of LIBOR rates

On 5 March 2021, the FCA announced the dates on which the various LIBOR rates will either cease to be provided or cease to be representative of their underlying market.

In addition to clarifying the timing for the end of LIBOR, the FCA announcement fixes the spread adjustments that will be added to the appropriate adjusted risk-free rates in accordance with the ISDA methodology for determining fallback rates.

The cessation dates confirmed in the FCA's announcement are as set out in the table below.

Cessation dates for the remaining LIBOR rates have not yet been specified, but the FCA confirms in the announcement that such rates will cease to be representative of their underlying markets on the dates shown in the table below. Thereafter, such rates may continue following changes to their methodology on a "synthetic" basis, as discussed in Further consultations on synthetic LIBOR and tough legacy below.

The FCA expects these rates to remain representative until the dates specified above.

The FCA has also published two important Policy Statements, setting out its policies on the designation of benchmarks as "Article 23A benchmarks" and the exercise of its powers to require changes to a benchmark's methodology. The policy statements largely mirror the approaches set out in preceding consultations, which are discussed in our previous briefing.

Further consultations on synthetic LIBOR and tough legacy

In Q2 of this year, the FCA plans to consider and consult further on the possible continuation of the non-representative rates on a "synthetic" basis (subject to enactment of the Financial Services Bill, discussed in our briefing), as described below.

• Sterling LIBOR – the FCA will consult on whether to use its powers under the amended UK Benchmark Regulation to compel ICE Benchmark Administration to continue publication of one-month, three-month and six-month Sterling LIBOR after 31 December 2021, for use in a limited set of "tough legacy" contracts on the basis of a changed methodology (so-called synthetic LIBOR) (as discussed in our briefing);
• Japanese Yen LIBOR – the FCA will also consult on whether to compel continued publication of one-month, three-month and six-month Japanese Yen LIBOR on a synthetic basis until 31 December 2022; and
• US Dollar LIBOR – the FCA will continue to consider the case for compelling continued publication of one-month, three-month and six-month US Dollar LIBOR on a synthetic basis for a prescribed period after 30 June 2023, and will take into account the views of the US authorities in this regard.

Where any rate continues to be produced on a synthetic basis (i) it will not be available for general use by UK supervised entities, but will be limited to certain legacy contracts only, and (ii) the methodology would be as proposed in the FCA's recent consultation (discussed in our briefing); i.e. a forward-looking term rate version of the applicable risk-free rate (SONIA, SOFR or TONA) plus a spread adjustment calculated in line with the ISDA fallback methodology.

A further consultation on what contract types may constitute "tough legacy" is also expected in Q2 2021.

ISDA guidance and trigger of Index Cessation Event

The FCA confirms in the announcement that it is made "in the awareness that it will engage certain contractual triggers for the calculation and future application of fallback provisions that are activated by cessation or pre-cessation announcements made by the FCA". This language has been included to ensure that the announcement triggers the pre-cessation limb of the Index Cessation Event contained in Supplement 70 to the 2006 ISDA Definitions (the ISDA Fallbacks Supplement) and other pre-cessation triggers that require a positive statement from the FCA to such effect.

In response, ISDA has confirmed that the FCA announcement constitutes an Index Cessation Event under the ISDA Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol for all LIBOR rates. The effect of this is that:

• the spread adjustment published by Bloomberg and used to calculate the fallback rates under the ISDA calculation methodology is fixed for all LIBOR rates as of 5 March 2021; and
• outstanding contracts that incorporate the ISDA Fallbacks Supplement, or the fallback terms contained therein, will automatically fall back to the relevant adjusted risk-free rate plus the applicable spread adjustment on (i) 1 January 2022 for all LIBOR rates other than US Dollar LIBOR and (ii) 1 July 2023 for US Dollar LIBOR.

Under the ISDA calculation methodology, between 31 December 2021 and 30 June 2023, one-week and two-month US Dollar LIBOR will be calculated using linear interpolation.

ISDA has also published Future Cessation and Non-Representativeness Guidance explaining the effect of the FCA's announcement on derivative transactions that incorporate the provisions set out in the ISDA Fallbacks Supplement or the 2006 ISDA Definitions Benchmarks Annex to the ISDA Benchmarks Supplement.

The FCA announcement is a significant step in the path towards LIBOR cessation. Although widely anticipated, the fixing of spread adjustments across all LIBOR settings under the ISDA methodology marks a crucial development not only in the derivatives market but also the cash markets. Today's announcement should remove one of the remaining obstacles to transition, enabling market participants to make a fully informed assessment of the pricing impact of the transition away from LIBOR to alternative risk-free rates.

Authors: Alex Biles, James Knight, Mike Logie, Kirsty McAllister-Jones