Treasury proposes UK BMR safe harbour provisions
13 September 2021
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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.
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:
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.
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
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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