The Financial Conduct Authority (FCA) has given approval for the continued publication of the 'synthetic' US dollar London Interbank Offered Rate (LIBOR) for a 'short period after 30 June 2023' when the US dollar LIBOR panel ceases. The rate permitted to be published by the ICE Benchmark Administration Limited (IBA) includes the one, three and six-month synthetic US dollar LIBOR settings.

FCA Sanctions US Dollar LIBOR Settings

The UK financial regulator’s decision, which was announced on Monday, comes four months after the watchdog launched a consultation on its proposal for the three US dollar LIBOR settings to be published after 30 June 2023. In its new update, the FCA said the permission will take effect on July 1, 2023. New use of the synthetic US dollar LIBOR will not be permitted, it added.

In early 2021, the FCA announced that it will cease the publication of LIBOR for the pound, sterling, euro, Swiss franc, Japanese yen and the one-week and two-month US dollar settings by year-end. In addition, the regulator disclosed the plan to halt the rest of the US dollar settings on June 30, 2023.

The action came after the reputation of LIBOR, which measures the cost of unsecured borrowing between banks, was soiled through bank manipulation.

In November of 2021, the regulator sanctioned the temporary use of ‘synthetic’ sterling and yen LIBOR rates in all legacy LIBOR contracts that had not been changed by the year-end deadline. A year later, the regulator proposed the ‘synthetic’ US dollar LIBOR as regulatory estimates show a $70 trillion of outstanding dollar LIBOR exposures beyond June 2023.

With the three US dollar LIBOR settings now approved, the FCA noted that the settings will be calculated by the IBA using “the relevant CME Term Secured Overnight Financing Rate (SOFR) Reference Rate plus the respective ISDA fixed spread adjustment.”

FCA Explains Publication Period

In the statement released on Monday, the FCA noted that the overnight and 12-month US dollar LIBOR settings will cease permanently after publication on 30 June 2023. This is even as the regulator has permanently stopped the publication of the 1 and 6-month synthetic sterling LIBOR settings. The settings were published for the final time last Friday (March 31, 2023), the watchdog disclosed.

The FCA started requiring the IBA to publish the one, three and six-month synthetic sterling LIBOR settings from the first of January last year. With the other versions now stopped, the three-month setting will be stopped on Thursday, March 28, 2024, according to the regulator.

“We intend that publication of the 1-, 3- and 6-month synthetic US dollar LIBOR settings will cease on 30 September 2024. We will review our decision, in line with the requirements of the Benchmarks Regulation. However, unless unforeseen and material events were to happen, we expect to follow the direction and timeline we have indicated. We consider providing early notice of this is helpful for market participants,” the FCA explained in the statement.

The UK watchdog reiterated that the synthetic LIBOR is only “a temporary bridge” and, therefore, urged firms to continue their active transition away from the US dollar benchmark. Furthermore, it noted that the listed US dollar settings are permitted for “all legacy contracts except cleared derivatives.”

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