First, the FCA announced that they were launching a consultation on their new benchmark powers that are currently going through the legislative process as part of the Financial Services Bill. We first referenced this in With great power comes great responsibility back in June, and it refers to new powers that the FCA will have to require the benchmark administrator to continue to publish certain critical benchmarks, but using a different methodology (read forward looking term RFR + spread, aka ‘synthetic LIBOR’). And they will restrict its use to certain narrowly defined ‘tough legacy’ scenarios.

Second, ICE announced that it “will consult on its intention to cease the publication of all GBP, EUR, CHF and JPY LIBOR settings” (note the omission of USD from that list). This is all about ceasing to publish LIBOR (the original flavour), not the FCA’s superpowers to construct a genetically modified successor. And this is probably the more interesting of the two statements, and raises a number of questions around timing and scope which we discuss further below.

The key date that everyone is waiting for is the formal statement that LIBOR will cease (the ‘index cessation event’ ISDA referenced), at which point we know ‘X’, i.e. the fixed spread adjustment between LIBOR and RFR* based on the 5 year median lookback methodology. The question is how do the announcements above play into that? We had thought we might get a pre-cessation announcement from the FCA as soon as December this year that would fix ‘X’ (e.g. Schooling-Latter’s recent ISDA interview on 3 November, fast forward to 7:15).

Given the ICE consultation, we now think more likely the consultation will play out first (and we pass the ISDA protocol effective date on 25 January?), then we will hear a formal statement about cessation. Not that it makes much difference to actual number whether the cut off comes in December or March!

There are two ways we can get ‘X’. Either ICE announce that they will cease publishing LIBOR from a given date or the FCA can determine that the benchmark will no longer be representative, also from a given date in the future (though in both scenarios it cannot be earlier than January 2022). Either of these statements counts as an index cessation event that would stop the clock on the 5 year lookback period.

Why now, and what happens next?

ICE has always said they would give market participants at least one year’s notice of cessation – by launching their consultation now they fulfil that promise in time for cessation in January 2022 if that is deemed necessary.

What we don’t know is what panel banks and regulators may have already said to ICE...if many have already indicated their intention to cease submitting as soon as they are no longer compelled to, that might lead ICE to make their own determination. If more nuanced they can present that information to the FCA to make the ultimate decision.

Of course we don’t have a crystal ball, but a plausible timeline might be:

• 18 Nov: ICE announce consultation
• Late Nov: ICE launch consultation
• Dec / Jan: ICE receive feedback from market participants
• 25 Jan: ISDA Fallback Protocol effective
• End Jan: ICE consultation closes
• Feb: ICE provide summary from consultation to market (but don’t announce cessation date?)
• Feb / Mar: FCA make pre-cessation statement about LIBOR being non-representative from Jan 2022, fixing Spread Adjustment as ‘X’

What happened to Dollars?

Perhaps most surprising thing about ICE announcement today was that USD was not included in scope of their consultation on ceasing LIBORs. Does this really mean that USD LIBOR might follow a very different timeline, or is it just that conversations are a little more involved there so they were not quite ready to announce a consultation yet?

Or perhaps combination of lack of liquidity in SOFR6, increased complexity with interaction between UK and US authorities, greater willingness of US banks to continue submitting (is there?), the retail nature of some of the US LIBOR market compared to UK and general readiness of US market for transition are all creating a drag?

And FCA as the super-hero?

Back to the first consultation we mentioned from the FCA. There is clearly quite a bit still to do to jump through the various consultation and legislative hoops before the FCA will be granted their new powers. They have made clear today that they would not be used ahead of the cessation announcements, but their timeline stretches well out into next year to complete the necessary steps regardless.

In the fullness of time this will provide a useful mechanism for tough legacy, but the UK authorities have repeatedly said that it will only be available within certain defined perimeters, so is not expected to be a silver bullet for everything. Meanwhile in US there is also progress both at a state and federal level around legislative solutions to cope with legacy LIBOR positions.

Wait and see

So perhaps we won’t have an firm announcement on X and the final cessation date by Christmas, but maybe we will quite soon in the new year. And if that does come, combined with widespread take up of the ISDA Fallback Protocol, and greater certainty around tough legacy, then it is shaping up to be a period of renewed certainty around transition. And with that might come more proactive transition of legacy exposure, but that’s a topic for another article on another day.

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright 2022 © NatWest Markets Plc. All rights reserved.