FCA Confirms Temporary Use of Synthetic LIBOR Rates

The 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) announced on Tuesday that it will allow temporary use of ‘synthetic’ sterling and yen LIBOR rates in all legacy LIBOR contracts that had not been changed by the year-end deadline.

Additionally, the regulator clarified that the synthetic rates could not be used for cleared derivatives or any new contracts.

The End of LIBOR

The British regulator, which oversees the global benchmark, decided to scrap the usage of the controversial LIBOR rates by the end of this year. Though the publication of most of the LIBOR rates for foreign currencies will cease on December 31, 2021, only some US dollar settings will continue till 30 June 2023.

Moreover, this decision prompted the financial regulators around the globe to come up with alternatives to the controversial, yet widely, used LIBOR benchmark.

The FCA first proposed the creation of the synthetic rates earlier in June for temporary use in existing contracts. The synthetic LIBOR will be calculated using a forward-looking term version of the relevant risk-free rate: SONIA for sterling and TONA for yen.

“Today’s publications form some of the final building blocks in the transition from LIBOR, a global effort led by the FCA and the Bank of England in conjunction with industry and overseas regulators,” said Edwin Schooling Latter, FCA’s Director of Markets and Wholesale Policy.

“But, work should not stop here. While synthetic LIBOR reduces risk in the transition and provides a Bridge Bridge The bridge or liquidity bridge is an essential component for brokers that are enabling their clients to trade at interbank rates directly via a Prime Broker or a Prime-of-Prime (PoP). While market makers do not require a bridge in order to service their clients, brokers which are sending through orders to a liquidity provider or an electronic execution venue need a bridge to connect their trading platform to the interbank market.Bridges are used extensively in forex trading, specifically for Met The bridge or liquidity bridge is an essential component for brokers that are enabling their clients to trade at interbank rates directly via a Prime Broker or a Prime-of-Prime (PoP). While market makers do not require a bridge in order to service their clients, brokers which are sending through orders to a liquidity provider or an electronic execution venue need a bridge to connect their trading platform to the interbank market.Bridges are used extensively in forex trading, specifically for Met Read this Term to Risk-Free Rates like SONIA, it will not last indefinitely, and contracts need to be moved away from LIBOR wherever possible.”

Furthermore, the neighboring European Commission recently confirmed its decision to replace CHF LIBOR and EONIA benchmarks with a Swiss Franc risk-free rate and risk-free euro short-term rate, respectively.