Libor’s U.K. overhaul could get a 10-year fix to avert chaos

U.K. regulators have raised the prospect that an artificial sterling Libor number could be published for up to a decade after the controversial benchmark is retired at the end of this year.

Concerned that some troublesome financial contracts won’t be able to switch to replacement benchmarks, the Financial Conduct Authority plans to publish a “synthetic” London interbank offered rate. The Bank of England said Friday that the FCA’s power to do this will need to be reviewed annually for a maximum of 10 years.

Most Libors are due to expire at the end of 2021, but regulators are concerned that bonds and securitizations risk descending into a legal limbo because they lack provisions necessary to switch to alternatives and are too complicated to renegotiate. To prevent a chaotic transition to the new benchmarks, the plan is to publish an artificial Libor number for some contracts, created without using banks’ trading data.

The FCA will shortly start consulting the financial industry on the synthetic Libor. It plans a similar arrangement for yen Libor, but intends for that to be published for only a year.

The market is now anxiously waiting for the Financial Services Bill to pass so that the plans can be put into operation before year-end, according to Patrick Clancy, a partner at law firm Shearman & Sterling.

Bloomberg

Regulators are unlikely to be generous in deciding which products can use synthetic Libor, said Claude Brown, a partner at Reed Smith LLP in London. Yet most of those that do fit the bill should be able to die off naturally within 10 years, he said.

“There are a few that it probably doesn’t help, such as 30-year swaps, or long-dated catastrophe and insurance-linked swaps but I suspect they’ll come to some sort of resolution,” he said.

The U.S. is planning to avoid synthetic Libor and instead New York state lawmakers approved legislation this week to smooth the transition, with the Federal Reserve calling for similar legislation at a national level. The BOE said the approach for dollar Libor tenors ending in mid-2023 would be kept under review.

“The availability and use of synthetic Libor around the world is one of the big unanswered questions,” said Marcus Burnett, director of SOFR Academy, an education technology firm whose clients include lenders and asset managers. “It looks like the different currencies are going to take a slightly different path. The U.K. is a global leader so everyone is watching, including the U.S.”