Treasury proposes UK BMR safe harbour provisions

What has happened?

On 8 September 2021, HM Treasury introduced to the House of Lords draft "safe harbour" rules that aim to protect users and administrators of rates that have been designated "unrepresentative" by the FCA but continue to be used on a synthetic basis after the end of 2021, under the UK's tough legacy regime or otherwise. The FCA expects to consult on the long-awaited question of exactly what types of contract should constitute tough legacy later this month, and a policy statement is expected to follow later this year. 

What are the proposed rules?

The draft rules are set out in the Critical Benchmarks (References and Administrators' Liability) Bill, which will amend the UK Benchmarks Regulation (UK BMR) by adding new Articles 23FA, 23FB and 23FC and making certain consequential amendments. If enacted without amendment, the new Articles will provide that:

• unless contractually agreed otherwise or the Treasury provides otherwise, where a particular LIBOR rate has been designated as unrepresentative or "at risk" under Article 23A, contractual references to that rate will continue to be interpreted as references to the same rate, even if its calculation methodology has changed and it is being calculated on a synthetic basis;
• contracting parties cannot argue that use of a synthetic rate constitutes breach of contract, material change to the contract, or frustration of the contract;
• the FCA's use of its powers to compel publication of synthetic LIBOR will not activate fallback clauses that can be triggered by benchmark cessation or unavailability; and
• claims for damages may not be brought against ICE Benchmark Administration (IBA), LIBOR's administrator, in respect of any action that it takes or does not take upon instruction by the FCA, such as changing its calculation methodology to produce synthetic LIBOR (although this immunity will not extend to actions taken of IBA's own accord or pursuant to a discretion conferred by the FCA).

What is the UK's tough legacy regime?

Under the UK BMR, the FCA has broad powers to manage the orderly wind-down of critical benchmarks like LIBOR. Article 23A gives the FCA the power to designate any LIBOR currency/tenor combination as unrepresentative of its underlying market.

Once a rate has been so designated, its future use in certain contracts by supervised entities in the UK is prohibited, except in certain "tough legacy" contracts. These are existing contracts that have been unable to transition away from LIBOR to a more appropriate rate. The FCA expects to consult on exactly what types of contract should constitute tough legacy later this month, and a policy statement is expected next quarter.

The FCA can also compel IBA to calculate an unrepresentative rate in a different way, creating "synthetic" LIBOR. In a consultation launched in June, the FCA suggested that synthetic GBP and JPY LIBOR will be the sum of the relevant term rate and the applicable spread adjustment published by Bloomberg Index Services Limited for use in fallback rates under Supplement 70 to the ISDA 2006 Definitions. A policy statement is expected soon and a further consultation on proposals for synthetic USD LIBOR is expected in due course.

What happens next?

The Bill will now undergo several readings in the House of Lords and the House of Commons, during which time it may be amended. Once agreed, it will receive Royal Assent.

Given that a number of LIBOR rates are expected to be designated as unrepresentative by the FCA at the end of this year, including the most commonly used GBP and USD LIBOR tenors, it is likely that the Houses will endeavour to progress the Bill swiftly.

To read more about the tough legacy regime and the consultations mentioned in this Newsflash, please visit the "Briefings" section of our LIBOR Transition Hub.

Authors: Mike Logie and Kirsty McAllister-Jones