FCA urges market participants to continue Libor-linked bond transition

The Financial Conduct Authority (FCA) has issued a statement encouraging issuers and holders of outstanding Libor-linked bonds to transition to fair alternative rates.

Many legacy Libor-linked bonds have already been converted by mutual agreement of issuer and bondholder to risk-free rates through processes such as consent solicitation.

The regulator urged holders of bond without robust fallbacks or another mechanism to remove reliance on Libor, to engage with the relevant issuer or their agent and request that they initiate conversion processes.

It is the issuer’s responsibility to initiate these processes, with the FCA calling on issuers of the remaining Libor-linked bonds to schedule consent solicitation processes for conversion to fair alternative rates.

While the FCA previously announced that most panel bank submissions for all Libor settings would cease at the end of 2021, some issuers and bondholders have benefited from the temporary continued publication of the one-, three- and six-month sterling and yen Libor settings using a ‘synthetic’ methodology.

The regulator required publication of these synthetic Libor rates to avoid a cliff edge at the end of 2021, giving issuers more time to arrange a transition to more robust alternative rates.

However, publication of synthetic yen Libor will cease at the end of this year.

“We have proposed to cease the requirement to continue publication of the one- and six-month synthetic sterling Libor settings at the end of March 2023,” the FCA added.

“We have also sought views on the earliest date at which the three-month sterling Libor setting could also cease in an orderly fashion.

“If you will be affected by the cessation of any remaining sterling Libor settings, we encourage you to respond to our consultation which closes on 24 August 2022.

“Publication of synthetic Libor settings will be for a temporary period only, and relying on such publication is therefore not an alternative to agreeing conversion through consent solicitation, or other arrangements for longer-maturity bonds.”

The US dollar Libor panel ends at the end of June 2023 and while bonds issued under US law may benefit from US legislation to covert these to risk-free rates at the end of June 2023, there are “significant numbers” of US dollar Libor bonds issued under English and other non-US law.

Although these will not benefit from US legislation, conversion through processes like consent solicitation is usually practicable under the standard terms of bonds written under non-US law in a way that might not be the case for those written under US law.

“We have said previously we would consider whether it is desirable to use our powers to require continued publication on a temporary and synthetic basis of the one-, three- and six- month US dollar Libor settings after end-June 2023,” the FCA said.

“We are seeking views on market participants’ outstanding US dollar Libor exposure to help us make this assessment in due course. Given the global use of US dollar Libor, we are keen to hear the views of impacted stakeholders beyond, as well as within the UK.

“However, market participants should not rely on such publication. If we do require publication of any synthetic US dollar Libor rates, this will be for a temporary period only. For longer-maturity bonds conversion through consent solicitation or other arrangements will be necessary.”

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