ICE Benchmark Administration consults on LIBOR phase-out
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ICE Benchmark Administration consults on LIBOR phase-out 19 November 2020UK Reporter: Maddie Saghir
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ICE Benchmark Administration (IBA) is set to consult on its intention to cease the euro, sterling, Swiss franc and yen London Inter-bank Offered Rate (LIBOR) panels at the end of 2021.
IBA, the Financial Conduct Authority-regulated and authorised administrator of LIBOR, explained it set out its potential approach to the use of proposed new powers under the Financial Services Bill to ensure an orderly phase out of LIBOR.
Its consultations focus on its proposed policy in relation to some of the new powers that would be granted to the FCA under the Benchmarks Regulation (BMR) as amended by the Financial Services Bill introduced into the UK Parliament on 21 October.
IBA published these based on the assumption that the bill is passed in its current form.
The exercise of these powers would be subject to a decision by IBA to cease publication of LIBOR as the conclusion of its consultation.
It would also be subject to the powers which have been proposed in the Financial Services Bill being enacted by Parliament, feedback to its policy proposals on how IBA may use its powers, and its subsequent consultations on decisions to use those powers once the policy is finalised.
“One of our consultations proposes our policy in relation to how we would use the proposed new power to require continued publication of critical benchmarks on the basis of a changed methodology in certain circumstances,” explained IBA.
Meanwhile, the other sets out views on the circumstances in which those powers would potentially become relevant,
“Under the proposed policy, we would not envisage using our powers where critical benchmarks (such as LIBOR currency-tenor settings) are little used, where the contracts referencing the benchmark can practicably be amended by contractual counterparties without our intervention, or where using the powers would not be necessary to protect consumers or market integrity,” IBA said.
The administration continued: “Nor would we envisage using the powers where appropriate inputs, as described in the proposed policy, are not available.”
According to IBA, if it were to adopt and apply its proposed policy to the LIBOR settings, there would be a case for using the proposed new powers to require a change to the LIBOR methodology.
IBA highlighted LIBOR currency-tenor settings are widely used in outstanding contracts and/or instruments that cannot practically be transitioned away from the benchmark rate by actions or agreements by or between contract counterparties themselves.
Using the powers would contribute to protecting consumers or preserving market integrity, according to IBA.
Additionally, IBA outlined using the powers would be feasible under our proposed policy if the preferred inputs to a new methodology of the types we have proposed are available to the LIBOR administrator.
“On the basis of the policy proposed and currently available evidence, it appears unlikely that the conditions and inputs for use of our powers to require continued publication of euro and Swiss franc LIBOR will exist at the time these panels are proposed to cease,” explained IBA.
Forward-looking, IBA suggested Sterling overnight index average (SONIA) term rates are available and tough legacy contracts exist in significant amounts in the sterling market.
“So, at least the most heavily used sterling currency-tenor settings would seem likely to meet these conditions when the publication of GBP LIBOR on the basis of a representative panel is proposed to cease,” IBA commented.
In relation to yen LIBOR, IBA will continue to assess whether it might be necessary and feasible to use the proposed powers in the case of more heavily used yen settings as the transition progresses.
Although IBA has not yet set out specific proposals in relation to the US dollar LIBOR settings, this policy framework would also be relevant to US dollar LIBOR.
IBA affirmed: “Any decision to use the power to require a methodology change in respect of LIBOR settings will take into account evidence and views from market participants and our counterpart global authorities, and will be consulted upon in due course.”
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