The Financial Conduct Authority (FCA) confirmed 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.
In addition, the regulator clarified that the synthetic rates could not be used for cleared derivatives or any new contracts.
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: Sterling Overnight Index Average (Sonia) for sterling and Tokyo Overnight Average Rate (Tonar) for yen.
Synthetic rates give market participants more time to shift to alternative rates such as the BoE’s Sonia.
“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.
He added, “But, work should not stop here. While synthetic Libor reduces risk in the transition and provides a bridge to risk free rates like Sonia, it will not last indefinitely, and contracts need to be moved away from Libor wherever possible.”
Alexandre Bon, group co-head of Libor and benchmark reform at Murex, said “With trillions of pounds worth of contracts still tied to Libor less with a matter of weeks to go until the deadline, alongside the fact that SONIA liquidity is struggling to build for some market segments including non-linear derivatives, the FCA has made a sensible decision.
The biggest issue is the fact that IBOR benchmarks and the new RFR’s have completely different dynamics and conventions. As a result, this brings a number of challenges for valuation and risk management, but also quite simply for systems.”
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