Rishi Sunak has made a written statement to Parliament on the Government’s proposals for ensuring LIBOR transition. The statement referenced previous statements that underline the importance of firms migrating away from LIBOR as a reference in contracts as they cannot rely on any extension to the currently agreed expiry date of the end of 2021.
The Government shares both the regulators’ pragmatism in recognising the delays COVID-19 has caused to the interim transition timetable and their urgency in encouraging the market actively to transition away from LIBOR. It needs to see the pool of contracts referencing LIBOR shrinking to an “irreducable core”, leaving behind only those with no realistic alternative and those that cannot realistically be renegotiated or amended. But it does recognise that legislative steps could be helpful in dealing with theses “tough legacy” contracts.
The Government intends to legislate to amend and strengthen the existing regulatory framework for critical benchmarks to give FCA powers to manage and direct any wind-down period prior to eventual cessation in a way that protects consumers and market integrity. To this end, it will, as part of the Financial Services Bill:
- ensure the existing framework can be used to manage different scenarios prior to a critical benchmark’s cessation;
- extend the circumstances in which FCA may require an administrator to change the methodology of a critical benchmark;
- ban use of an individual critical benchmark where its representativeness will not be restored; and
- refine regulation to make sure it is effective in managing the orderly wind-down of a critical benchmark.
Finally, the Government stressed that active transition of legacy contracts is far preferable to relying on regulatory action – so those who can transition away from LIBOR should do so on terms they and their counterparties agree.