Synthetic LIBOR

Interest rates - reference rates - LIBOR transition - GBP, USD & JPY - Financial Conduct Authority.

Synthetic LIBOR was a temporary and strictly limited successor to LIBOR for sterling (GBP) and US dollar (USD), after the cessation of the previous LIBOR panels at the end of 2021.

Wrapping up LIBOR ...?

"The cessation of the publication of synthetic GBP LIBOR at the end of March [2024] marked the end of an era, and it pretty much passed everyone by – just as it was meant to...

USD synthetic LIBOR will cease at the end of September 2024. Generally speaking, and particularly in the US, transition away from USD LIBOR is also complete. HOWEVER, if you have USD borrowings elsewhere in the world, do check that your counterparties are ready for the end of LIBOR – we are still hearing of lack of readiness, particularly amongst developing markets or smaller banks.

The provision of a Term SOFR solution in the US that’s available for business loans arguably makes life more straightforward but the use case is pretty limited, hedging may be difficult and will certainly be costly – and finally if you have some currencies that ‘have’ to reference an overnight rate and have systems set accordingly, have a term rate in the mix may just complicate everything.

We (and the regulators) are watching closely to see just how widely Term SOFR gets adopted – it solved a problem in the US markets but regulators do not want to see it used as the thin end of the wedge… something we’ll be watching out for and will keep you posted.

CAD transition to CORRA continues. The Canadian market is rather different to most others (as those of you who operate there will be aware) and the working group in Canada have produced helpful resources that can be found at: Canadian Alternative Reference Rate Working Group - Bank of Canada with a particularly useful series of webinars to watch on demand.

Other jurisdictions, notably South Africa and Australia, continue to work through transition but broadly speaking are following the approach established by the sterling market."

Association of Corporate Treasurers - Sarah Boyce - 19 April 2024.

Wind-down of LIBOR

"We are proposing to require LIBOR’s administrator, IBA, to continue to publish the 1-, 3- and 6-month US dollar LIBOR settings under an unrepresentative ‘synthetic’ methodology until end-September 2024.

After this, publication would cease permanently.

For sterling LIBOR, we intend to continue to require IBA to publish the 3-month synthetic sterling LIBOR setting until end-March 2024, after which it will cease permanently.

The effect of these announcements and proposals is that the final LIBOR publication would be end-September 2024:

• the 3 synthetic yen LIBOR settings will cease at end-2022
• the 1- and 6-month synthetic sterling LIBOR settings will cease at end-March 2023
• the overnight and 12-month US dollar LIBOR settings will cease at end-June 2023
• the 3-month synthetic sterling LIBOR setting will cease at end-March 2024
• the 1-, 3- and 6-month synthetic US dollar LIBOR settings would cease at end-September 2024 (proposed) "

Further consultation and announcements on the wind-down of LIBOR - Financial Conduct Authority - 23 November 2022.

New use of synthetic LIBOR is banned

"The 1, 3 and 6 month sterling and Japanese yen LIBOR settings are Article 23A benchmarks, meaning they are now permanently unrepresentative of the underlying market they seek to measure. This is because the panel of banks, which used to provide submissions to create these rates, has now ended.

From today [4 January 2022], these 6 LIBOR settings will be calculated in a way that does not rely on submissions from panel banks. Market participants generally call this 'synthetic' LIBOR...

We have also published a Notice allowing use of these synthetic rates in all legacy contracts except cleared derivatives...

Synthetic yen LIBOR will cease at the end of 2022.

Availability of synthetic sterling LIBOR is not guaranteed beyond end-2022, so firms’ efforts to transition away from it should continue.

We also remind market participants that new use of synthetic LIBOR is banned."

Changes to LIBOR as of end-2021 - Financial Conduct Authority.

Key points for corporates from Edwin Schooling Latter's speech (FCA) - synthetic LIBOR

"While the FCA is also taking steps to provide a time limited safety net to help contracts that can’t be transitioned, this does not remove the need for firms to act.

Certain, yet to be determined ‘tough legacy’ contracts will be allowed to use a synthetic LIBOR rate based on forward-looking term RFRs, so SONIA for sterling, plus the relevant ISDA spread adjustment."

ACT blog - Sarah Boyce - 15 July 2021.

See also

• Article 23 benchmark
• Benchmarks Regulation
• CAD
• Cleared derivatives
• CORRA
• Derivative instrument
• Financial Conduct Authority (FCA)
• ISDA spread adjustment
• Legacy
• LIBOR
• Panel
• Panel bank
• Risk-free rates (RFR)
• Setting
• SOFR
• SONIA
• Synthetic
• Term SOFR
• Tough legacy
• Transition
• Transition risk
• Uncleared derivatives
• USD LIBOR

Other resources

• Wrapping up LIBOR...? Association of Corporate Treasurers - Sarah Boyce - 19 April 2024
• Further consultation and announcements on the wind-down of LIBOR - Financial Conduct Authority - 23 November 2022
• Changes to LIBOR as of end-2021 - Financial Conduct Authority
• FCA consults on proposed decision to require synthetic LIBOR for 6 sterling and Japanese yen settings