FCA ANNOUNCES DECISION ON SYNTHETIC USD LIBOR
April 4, 2023
On April 3, 2023, the UK's Financial Conduct Authority (FCA) announced its decision to publish synthetic US dollar (USD) LIBOR as a temporary solution for tough legacy contracts referencing USD LIBOR outside the United States. The synthetic USD LIBOR will be based on CME's Term SOFR rate and the relevant ISDA fixed credit spread and will be published until September 2024, or 15 months after June 30, 2023, when the USD LIBOR panel is due to cease.
The FCA emphasized that synthetic USD LIBOR rates will not be representative of the market that LIBOR is intended to reflect and will only be used in legacy contracts.
The FCA urged market participants not to rely on synthetic LIBOR and to transition to alternative rates wherever possible. Most contracts under US law should have workable fallbacks or will be covered by the LIBOR Act. Any contract with pre-cessation triggers will transition directly to SOFR and not reference synthetic LIBOR. The FCA aims to provide a temporary, unrepresentative solution to address the issue of tough legacy contracts referencing USD LIBOR outside of the United States until they can be transitioned to alternative rates.
It should be noted, however, that certain contracts under US law and not covered by the LIBOR Act may potentially continue to reference synthetic USD LIBOR. In particular, if LIBOR is unavailable, older loan contracts that do not contain a pre-cessation trigger but designate a specific, non-LIBOR fallback rate (such as Prime) would not be covered by the LIBOR Act. In this case, the contracts may consider the use of synthetic USD LIBOR. Market participants should review contracts with their legal counsel and understand how the fallbacks for each contract are expected to work.
Given synthetic LIBOR's temporary and unrepresentative nature, the FCA has advised market participants not to rely on it; those that can transition should do so. This aligns with US Supervisory expectations that have long emphasized the expectation that market participants progress toward an orderly transition away from LIBOR.
Please see the FCA’s LIBOR transition webpage for further information. In addition, to help the CMBS community navigate the transition, CREFC recently published the LIBOR Legacy Playbook. Recognizing the importance of a well-executed and successful transition, the Playbook is primarily tailored to a servicer’s role in the transition of floating rate loans from a LIBOR index to a SOFR index. Nonetheless, many of the processes and procedures outlined may be helpful to other parties, such as certificate administrators, trustees, operating advisors, and rating agencies.
For any additional questions on the FCA decision or the LIBOR transition in general, please get in touch with Raj Aidasani or Lisa Pendergast.