The FCA Proposes 'Synthetic' Dollar LIBOR Rate

The UK's Financial Conduct Authority (FCA Financial Conduct Authority (FCA) The Financial Conduct Authority (FCA) is the largest financial regulator for all financial markets in the United Kingdom (UK).The UK regulator is responsible for the conduct of firms authorized under the Financial Services and Markets Act 2000. Moreover, the FCA is also responsible for the regulation of behavior in retail and wholesale financial markets, supervision of the trading infrastructure that supports those markets, and the prudential regulation of firms not regulated by the PRA. Its rol The Financial Conduct Authority (FCA) is the largest financial regulator for all financial markets in the United Kingdom (UK).The UK regulator is responsible for the conduct of firms authorized under the Financial Services and Markets Act 2000. Moreover, the FCA is also responsible for the regulation of behavior in retail and wholesale financial markets, supervision of the trading infrastructure that supports those markets, and the prudential regulation of firms not regulated by the PRA. Its rol Read this Term) proposed the publication of 'synthetic' LIBOR Libor Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Libor stands for London Inter-bank offered rate. It is an industry-specific term which most of us would never have heard of until the "Libor scandal" became popularized in 2012. Libor is considered to be one of the most important interest rates in finance, upon which trillions of financial contracts rest. The Libor rate effects over $800,000,000,000,000 in financial deals. Banks simply cannot lend money to one another whenever they like as there is a system in place. Every day a group of leading Read this Term settings of the US dollar until the end of September 2024. Announced on Wednesday, the UK financial watchdog is promising to allow the publication of 1, 3 and 6 months synthetic LIBOR settings for the US dollar.

The latest announcement of the FCA indicates that the proposed schedule to end all publications of LIBOR is at the end of September 2024.

The FCA, which oversees LIBOR, scraped the usage of the controversial LIBOR rates in 2021. Though the publication of most of the LIBOR rates for foreign currencies ceased on 31 December 2021, only some US dollar settings will continue until 30 June 2023.

The US dollar synthetic LIBOR proposal came in line with the regulatory estimate of $70 trillion of outstanding dollar Libor exposures beyond June 2023. The FCA has specified that synthetic rates are not for use in new contracts but are "intended for use in certain legacy contracts only."

A Temporary Measure

The regulator came up with the 'synthetic' LIBOR settings last year in November as a temporary measure. Initially allowed only for sterling and yen, the synthetic LIBOR settings are calculated using a forward-looking term version of the relevant risk-free rates: SONIA for sterling and TONA for yen.

The three synthetic yen LIBOR settings will cease at the end of 2022, while the one and six-month synthetic sterling LIBOR settings will cease in March 2023. The 3-month setting for synthetic sterling LIBOR will be allowed until March 2024

"Any synthetic LIBOR settings are only a bridge to appropriate alternative risk-free rates, not a permanent solution. As such, market participants should continue to prioritize active transition and focus on converting their legacy contracts to risk-free rates as soon as possible," the regulator stated.

The London Interbank Offered Rate (LIBOR) was once the most important number in the financial services industry. It measures the cost of unsecured borrowing between banks. However, the reputation of LIBOR was tainted by the manipulation of its rates by several banks. Many traders were charged and penalized for their role in this mass Forex market rigging.