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LIBOR transition - HM Treasury to bring forward legislation to help deal with tough legacy contracts

  • United Kingdom
  • Financial services and markets regulation
  • Financial services - Retail finance


HM Treasury announced, in a written statement by the Chancellor to Parliament on 23 June 2020, that it intends to bring forward legislation to amend the Benchmarks Regulation (BMR) under the forthcoming Financial Services Bill, to provide powers to the FCA to help manage an orderly wind-down of critical benchmarks such as LIBOR, which is expected to cease to exist after 2021. The government acknowledges that the interim timetable for transition away from LIBOR has been slowed by Covid-19 but reiterates that firms cannot rely on the benchmark’s continued publication as the current voluntary agreement between the FCA and LIBOR panel banks will expire after end-2021.

Difficulties with “tough legacy” contracts

The Working Group on Sterling Risk-Free Reference Rates (RFRWG) of ‘tough legacy’ contracts previously identified LIBOR-linked contracts that have limited or no appropriate alternate benchmark to LIBOR and no realistic ability to be renegotiated or amended.  The government has decided that as the UK has an existing regulatory framework for critical benchmarks such as LIBOR, that the most effective measure for dealing with these “tough legacy” contracts is to amend that broader, existing framework, rather than to impose legal changes on those individual LIBOR-referencing contracts that are governed by UK law. 

The new legislative aims

The legislation (by amendments to the Benchmarks Regulation 2016/1011, as amended by the Benchmarks (Amendment) (EU Exit) Regulations 2018), will ensure that FCA powers are sufficient to manage an orderly transition from LIBOR and will empower the FCA to direct the LIBOR administrator to change the benchmark methodology, where the FCA has found that LIBOR (or other critical benchmark) is not representative of the market it seeks to measure and representativeness will not be restored without intervention.  The power would be used by the FCA where necessary as part of its wider remit to protect consumers and ensure market integrity.  Although the power would not make the benchmark representative again, it would allow the FCA to stabilise certain LIBOR rates during a wind-down period so that limited use of LIBOR reference rates in those legacy contracts could continue.  The changes will also strengthen existing law to prohibit use of an individual critical benchmark where its representativeness will not be restored, whilst giving the regulator the ability to specify limited continued use in legacy contracts.

The FCA’s position

The FCA’s supporting statement makes clear that regulatory action to change LIBOR methodology may not be feasible in all circumstances, for example where the inputs necessary for an alternative methodology are not available in the relevant currency.  The FCA goes on to state that even if regulatory action to change the methodology enabled by the legislation is feasible, parties who rely on such action will not have control over the economic terms of that action (i.e. their LIBOR-linked contracts may produce a lower or higher rate than was previously the case).  The FCA also notes that such methodology change may also be unable exactly to replicate the preferred structures expected to prevail in the new markets based on the RFRs. 

Firms’ progress on LIBOR transition

The FCA reminds firms that they must continue active transition from LIBOR as this is the “only way for parties to have certainty about contractual continuity and control over their contractual terms when LIBOR ceases or is no longer representative.”  Firms should therefore continue to work to renegotiate or amend existing LIBOR contracts before the end of 2021.  The RFRWG has recommended, in light of the joint statements made by the FCA and the Bank of England on the 25th March and 29th April 2020 that it would not be feasible to complete transition away from LIBOR across all new sterling LIBOR linked loans by the original end-Q3 2020 target.  The RFRWG therefore now recommends that firms’ effective progress on LIBOR transition should include:

  1. by the end of Q3 2020 lenders should be in a position to offer non-LIBOR linked products to their customers;
  2. after the end of Q3 2020 lenders, working with their borrowers where appropriate, should include clear contractual arrangements in all new and re-financed LIBOR-referencing loan products to facilitate conversion before end-2021, by using pre-agreed conversion terms or an agreed process for renegotiation to SONIA or other alternative reference rates; and

All new issuance of sterling LIBOR-referencing loan products that expire after the end of 2021 should cease by the end of Q1 2021.