ICMA response to FCA CP22/11 on winding down ‘synthetic’ sterling LIBOR and US dollar LIBOR
US dollar LIBOR
- It is important that synthetic US dollar LIBOR is published from end-June 2023 in order to reduce the risk of a disorderly wind-down in the international bond market when panel-bank US dollar LIBOR ceases to be published. The FCA should also grant permission for synthetic US dollar LIBOR to be used for all outstanding legacy US dollar LIBOR bonds, as it has done for synthetic sterling LIBOR.
- Synthetic US dollar LIBOR is required in the bond market because there are considered to be insurmountable barriers to transitioning all legacy US dollar LIBOR bonds (including securitisations) before end June 2023. This is primarily because there are a very high number of legacy US dollar LIBOR bonds governed by English and other non-US laws with traditional (Type 1) fallbacks that are considered to be inappropriate. This number is significantly higher than the number of legacy sterling LIBOR bonds outstanding at the time that synthetic sterling LIBOR was introduced. It will be very challenging to transition all those legacy US dollar LIBOR bonds away from LIBOR before end-June 2023. The challenge is particularly acute because US dollar LIBOR bonds are held by a wide range of different types of investors, including retail investors, located around the world, some of whom may have limited (or even no) awareness of LIBOR transition. There may also be other difficulties with transitioning legacy US dollar LIBOR bonds (including securitisations).
- Synthetic US dollar LIBOR could ensure international alignment between the UK market and the US market for as long as it is published, giving more time for active transition of legacy US dollar LIBOR bonds governed by English law with traditional (Type 1) fallbacks, where feasible, and more time for bonds to mature, where it is not. In particular, synthetic US dollar LIBOR would avoid US dollar LIBOR bonds governed by English law with traditional (Type 1) fallbacks falling back to a fixed rate after 30 June 2023 when most US dollar LIBOR bonds governed by a US law remain on a floating rate pursuant to US federal legislation. The synthetic US dollar LIBOR rate should be the same as, or as close as possible to, the rate expected under US federal legislation (ie term SOFR plus a spread). As with synthetic sterling LIBOR, synthetic US dollar LIBOR should help to minimise the risk of market disruption and litigation that could otherwise arise when panel-bank US dollar LIBOR ceases on 30 June 2023.
Synthetic sterling LIBOR
- The current publication of synthetic sterling and yen LIBOR is helpful for bond market participants that are unable to transition legacy sterling and yen LIBOR bonds actively.
- The FCA needs to be clear beyond doubt that there are no significant remaining risks of market disruption and litigation before it takes the decision to withdraw synthetic sterling LIBOR in a particular setting.
- It would be very difficult for the FCA to be clear beyond doubt this year in the case of the 3-month setting, and much better to be prudent by conducting another review next year. The risks in the bond market are likely to be lower in the case of the 1- and 6-month settings, as there are fewer legacy bonds referencing those settings.