In June 2017, the FCA published a consultation paper (CP17/5) on its proposed approach to its powers to compel contributions to the London Interbank Offered Rate (LIBOR).
The FCA anticipates the European Commission will designate LIBOR as a critical benchmark under the Benchmarks Regulation (BMR) later in 2017, or on 1 January 2018. On that latter date:
- the BMR will be fully in force; and
- article 23 BMR will give the FCA additional powers, to those it has under FSMA, to compel banks to make LIBOR submissions.
In preparation for exercising these new powers, the FCA:
- is seeking feedback on the proposals contained in the consultation paper by 12 August;
- is to publish a Policy Statement this September.
Currently, the FCA can compel contributions to LIBOR under FSMA if it deems this necessary. Under the BMR regime, the FCA will be obliged to use its powers under the BMR, instead of under FMSA, if the firm it wishes to compel is a "supervised entity" – broadly, an EU-authorised financial services firm.
Who to compel?
The consultation paper sets out the FCA's thoughts on how it will decide which banks to compel under the BMR regime. The FCA needs a methodology for identifying compellable banks as, if a panel bank decides to stop contributing to LIBOR, the FCA can only require that bank to keep contributing for four weeks. Following this, the FCA must exercise the full BMR compulsion power after applying a relevant market participation test.
Relevant market participation
Under the BMR, compelled contributions to a critical benchmark must be based on actual and potential participation in the market the benchmark intends to measure. This is to maintain the existing quality of LIBOR, by selecting banks of similar quality to the existing panel banks. Therefore, to establish the pool of compellable banks, the FCA will first measure the relevant market.
The FCA proposes that the relevant market should be "the interbank and corporate unsecured wholesale funding market for GBP, USD, EUR, CHF and JPY involving large banks that have good credit quality and a presence in the United Kingdom". This gives the FCA three selection criteria: size, credit quality and presence in the UK. Therefore, the FCA will, in effect, select banks of a similar size and credit quality to the existing panel banks, to avoid changing the nature of LIBOR.
To apply the BMR's relevant market participation test, the FCA proposes pre-selecting banks that fit its size, credit quality and UK presence criteria. From that pre-selected pool, the FCA will request further data measuring actual and potential market participation so as to rank the strongest potential panel banks. In carrying out this ranking:
- actual participation will be measured by number and value of transactions in the market; and
- potential participation will be measured using factors including the size of the banking group, its participation in related markets and the bank's lending and borrowing activity.
The FCA is currently requesting the relevant data from around 50 banks. It will then decide how to assess which banks to compel from the ranked pool.
The FCA's approach
The FCA has stated it will only use its compulsion powers:
- if this is necessary for market integrity or consumer protection;
- in accordance with the BMR, where applicable; and
- on a time-limited basis.
When using its BMR powers, the FCA will be expected to apply the methodological framework ESMA recently published on selection of firms for mandatory contribution to critical benchmarks.
In assessing LIBOR's necessity for market integrity, the FCA will consider whether there are credible alternative interest rate benchmarks available to market participants. In this connection, the FCA points to its work on reforming these major interest rate benchmarks, suggesting this work may make compelling LIBOR panel banks to keep contributing unnecessary. The FCA also clarifies that it:
- will not use its compulsion powers to increase contributor numbers; and
- may not compel contributions for all maturities for each currency.
However, the consultation paper does not address the wider issue of banks' potential reluctance to help set LIBOR – particularly in the wake of the LIBOR scandals of recent years. That reluctance may partly be an unintended consequence of the FCA's increased focus on accountability, and increased regulation in this area.