The FCA consulted on the way in which it would use its powers under FSMA (sections 55L, 137A and 137F) or the Benchmarks Regulation (BMR) to compel firms to contribute to LIBOR. The BMR power has not yet arisen, but the FCA's consultation is intended to be compatible with it. In particular, the FCA referred to one of the tests for compulsion under the BMR, being the firm's "actual and potential participation in the market that [LIBOR] intends to measure". This test requires the FCA to define the relevant market for these purposes and this formed part of its consultation.
Some interesting points, as to the FCA's general approach as well as specific proposals, include:
- the FCA does not rule out making firms contribute to LIBOR even where they are not already contributors, or do not contribute to the relevant currency;
- the FCA envisages that it would require contributions only from large banks that have good credit quality (issued debt of investment grade) and a presence in the UK;
- the FCA is consulting on its proposed criteria for measuring actual market participation, but is simultaneously gathering the data such criteria contemplate; and
- the FCA's estimate of the ongoing cost of contributing to LIBOR (£2.4 million each year) and the initial one-off cost to set up the infrastructure for doing so (£3.5 million).
While the FCA initially proposed to publish responses to the consultation and final rules in September 2017, it has not done so, probably because of the later announcement of the demise of LIBOR from 2021.
Handbook changes to reflect the application of the EU Benchmarks Regulation
- application of the SMCR (Senior Managers and Certification Regimes) and Approved Persons regime to benchmark activities;
- prudential requirements for administrators of benchmarks;
- expectation that administrators should forward to the FCA all suspicions of benchmark manipulation;
- provisions relating to a right of those compelled to contribute or continue administrating a benchmark to make representations to the FCA;
- application of BMR provisions to contributors that are UK branches of third country (i.e. non-EU) firms; and
- how the FCA intends to deal with applications for authorisation or registration under the BMR.
The FCA published final rules in late December 2017, which we will cover in the next edition of this update.
End of LIBOR
Speech by Andrew Bailey, 27 July 2017
In a speech on 27 July 2017, Andrew Bailey announced that LIBOR would be supported for a further five years, to the end of 2021, with a transition away from it taking place by the end of that time. He said: "We do not think we will complete the journey to transaction-based benchmarks if markets continue to rely on LIBOR in its current form. And while we have given our full support to encouraging panel banks to continue to contribute and maintaining LIBOR over recent years, we do not think markets can rely on LIBOR continuing to be available indefinitely." (Please click here for our note on that speech.)
Since then, the FCA has confirmed (on 24 November 2017) that all 20 panel banks have committed to ensuring the sustainability of LIBOR until the end of 2021. It has since announced the start of the next phase of sterling LIBOR transition work, together with the Bank of England (announcement of 29 November 2017). The announcement refers to the expanded, market-led Working Group, and its role in catalysing the change to SONIA as the primary sterling interest rate benchmark by the end of 2021.