In a June 23, 2020 statement, the Chancellor of the Exchequer, Rishi Sunak, said that the UK government has been closely following both domestic and global LIBOR regulatory developments and shares the regulators’ sense of urgency that markets “must continue actively transitioning away from LIBOR” and recognizes that “legislative steps could help deal with ‘tough legacy’ contracts that cannot transition from LIBOR.”1
The government also stated that, in a forthcoming Financial Service Bill, it intends to:
- Amend the UK’s existing regulatory framework for benchmarks to ensure it can be used to manage different scenarios prior to a critical benchmark’s eventual cessation. In particular, the Government will introduce amendments to the Benchmarks Regulation 2016/1011 as amended by the Benchmarks (Amendment) (EU Exit) Regulations 2018 (the ‘UK BMR’), to ensure that FCA [Financial Conduct Authority] powers are sufficient to manage an orderly transition from LIBOR.
- Extend the circumstances in which the FCA may require an administrator to change the methodology of a critical benchmark and clarify the purpose for which the FCA may exercise this power. New regulatory powers would enable the FCA to direct a methodology change for a critical benchmark, in circumstances where the regulator has found that the benchmark’s representativeness will not be restored and where action is necessary to protect consumers and/or to ensure market integrity.
- Strengthen existing law to prohibit use of an individual critical benchmark where its representativeness will not be restored, whilst giving the regulator the ability to specify limited continued use in legacy contracts.
- Refine ancillary areas of the UK’s regulatory framework for benchmarks to ensure its effectiveness in managing the orderly wind down of a critical benchmark, including that administrators have adequate plans in place for such situations.
The statement also notes that the government:
… agrees with the RFRWG’s Tough Legacy Taskforce that active transition of legacy contracts remains of key importance and provides the best route to certainty for parties to contracts referencing LIBOR. Parties who rely on regulatory action, enabled by the legislation the Government plans to bring forward, will not have control over the economic terms of that action. Moreover, regulatory action may not be able to address all issues or be practicable in all circumstances, for example where a methodology change is not feasible, or would not protect consumers or market integrity. This reinforces the importance of parties who can transition away from LIBOR doing so on terms that they themselves agree with their counterparties.
This statement shows that LIBOR transition generally and possible legislation to mitigate the unintended and potentially harsh results under “tough legacy” contracts in particular have the attention of the UK government and is further evidence of the ever-louder global call for LIBOR transition by the end of 2021.
1 See the recent paper of the Tough Legacy Taskforce of the Bank of England’s Working Group on Sterling Risk-Free Reference Rate (RFRWG) at: https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/paper-on-the-identification-of-tough-legacy-issues.pdf?la=en&hash=0E8CA18F27F75352B0A0573DCBBC93D903077B6E.