On October 21, 2020, the UK Government introduced the Financial Services Bill (the Bill) to Parliament. The Bill is seen as a vital step towards ensuring the UK’s continued status as a global finance hub in the post-Brexit world, and it also introduces the UK Government’s legislative fix for LIBOR-referencing contracts that face insurmountable barriers in the transition from LIBOR (“tough legacy contracts”), as announced in June and discussed in our earlier update.
In a Policy Statement issued by HM Treasury accompanying the Bill, the Treasury have clarified that though they still urge firms to actively transition their portfolios from LIBOR to risk-free rates, the measures included in the Bill are in recognition of the fact that certain tough legacy contracts will not be capable of active transition. As such, the Bill will, if passed, amend the Benchmarks Regulation to provide the FCA with new and enhanced powers to manage the orderly wind-down of a critical benchmark (i.e. LIBOR).
The FCA’s new and enhanced powers
Under the Bill’s proposed framework, the FCA will be given the power to serve a notice on the administrator of a critical benchmark that the benchmark is unrepresentative, or that its representativeness is at risk. Upon service of such a notice, the FCA will be able to designate that benchmark as an “Article 23A benchmark”. Supervised entities will be prohibited from using an Article 23A benchmark, unless that benchmark falls under the exception found at Article 23C, which sets out that the FCA can issue a notice permitting “some or all legacy use of the benchmark by supervised entities”.
Should the FCA permit an Article 23A benchmark to continue to be used, the Bill grants them the power to direct a methodology change for the calculation of that benchmark, which includes the way in which the benchmark is determined and the rules of that benchmark. These powers will not be limited by market or economic realities, but the FCA can have regard to those factors, and must only exercise these powers if they consider it appropriate to ensure the orderly cessation of that benchmark, or to advance either of the FCA’s consumer protection and integrity objectives. The FCA will also be required to prepare and publish a policy statement upon the exercise of these powers.
Though the Bill may provide some reassurance to firms with legacy LIBOR-referencing contracts that they are struggling to transition, it does leave something to be desired as it does not provide an insight into what sort of contracts will fall within the Article 23C exception. This leaves market participants in the dark as to what contracts will be deemed “tough legacy”, and therefore be able to benefit from this legislative fix. Due to this ongoing uncertainty, firms should continue to be proactive in transitioning their legacy books away from LIBOR, and should only expect these new FCA powers to come to their assistance for contracts that truly face the insurmountable barriers that HM Treasury discuss in their policy statement.
Readers should be aware that the Bill is subject to scrutiny by the House of Commons and House of Lords, and so the provisions described in this update are subject to change. Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.