FCA proposes calculation methodology for synthetic sterling and Japanese yen LIBOR

On 24 June 2021, the FCA launched a consultation seeking feedback on its proposed requirement of ICE Benchmark Administration (IBA) to change the way in which it calculates one-month, three-month and six-month sterling and Japanese yen LIBOR (the affected rates) after 31 December 2021, when the affected rates will cease to be representative of their underlying market.

In the consultation, the FCA proposes that the amended, "synthetic", versions of the affected rates should be the sum of:

• the forward-looking term rate for the applicable tenor based on either (i) the ICE Term SONIA Reference Rate provided by IBA, or (ii) the Tokyo Term Risk Free Rate provided by QUICK Benchmarks Inc., as applicable; and
• the applicable spread adjustment published by Bloomberg Index Services Limited for use in fallback rates under Supplement 70 to the ISDA 2006 Definitions (together, the proposed calculation methodology).

The FCA's power to impose an altered calculation methodology is conferred by Article 23D of the UK Benchmarks Regulation (UK BMR) and is dependent on the exercise of related powers under the UK BMR to (i) compel continued publication of the affected rates after 31 December 2021, and (ii) designate the affected rates as "Article 23A" benchmarks thereunder. In the consultation, the FCA confirms that it currently intends to exercise both of these powers, with publication of Japanese yen LIBOR expected to continue until the end of 2022, and sterling LIBOR likely to continue thereafter.

The consultation is seeking respondents' views on the FCA's proposal, including on the proposed calculation methodology. The consultation closes on 27 August 2021 and the FCA will announce its final policy in Q4 2021.

In the consultation, the FCA acknowledges that a "material amount" of outstanding legacy bonds, loans and securitisations (i) reference an affected rate, (ii) do not contain appropriate fallbacks, and (iii) cannot practicably be amended before the end of 2021, and suggests that these may constitute "tough legacy" for UK BMR purposes. The FCA also explicitly recognises the difficulties in amending bond documentation within the timeframe available, particularly where consent thresholds are high. All of this will provide some comfort to issuers and lenders who are, as the FCA acknowledges, experiencing difficulties engaging with bondholders and borrowers to secure active transition. However, until the results of the forthcoming Q3 consultation on the scope of tough legacy are known, and the related FCA policy statement has been published in Q4, the official parameters of tough legacy remain unknown.

For more information on the FCA's new powers under the UK BMR, including its ability to designate benchmarks as Article 23A benchmarks, see our previous briefing and our LIBOR Transition Hub.

Authors: Mike Logie, Kirsty McAllister-Jones and Amelia Howison