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The UK government will propose legislation to amend the UK regulatory framework applicable to the LIBOR benchmark. In a statement made on June 23, 2020, the Chancellor of the Exchequer said that the proposed amendments will give the UK Financial Conduct Authority ("FCA") additional powers in circumstances where LIBOR ceases to be representative of the market it seeks to measure. The UK has recognized that this scenario may occur in the lead-up to the cessation of the LIBOR rate scheduled for the end of 2021, as panel banks will no longer be compelled to take part in the LIBOR calculation process.
The new powers will permit the FCA to direct the administrator of LIBOR to change the methodology used to calculate the benchmark. Although this would not result in LIBOR becoming representative again, it would allow a LIBOR figure to continue to be used in limited circumstances for a narrow category of "tough legacy" contracts which cannot transition from LIBOR to alternative rates.
In addition, the FCA has issued a statement and a Q&A on the proposed new powers, and has committed to publish statements of policy on its approach to the use of these powers following further engagement with stakeholders in the UK and internationally.
The plan for legislative action by the UK government follows a May 2020 report from the Bank of England Tough Legacy Taskforce of the Working Group on Sterling Risk-Free Reference Rate, which identified issues surrounding "tough legacy" contracts in the context of the transition from LIBOR.
Commentary
Adoption of legislation of this nature could have a significant impact on market participants' approach to the LIBOR transition process.
Primary Sources
- UK Parliament Statement: Financial Services Regulation
- FCA FAQ: Benchmark Regulation - Proposed New Powers
- FCA Statement: FCA Statement on Planned Amendments to the Benchmarks Regulation
Originally published June 23, 2020
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