Response to Consultation: Supporting the wind-down of critical benchmarks: 15 March 2021

In July 2017 a landmark speech by Andrew Bailey, then Chief Executive of the Financial Conduct Authority (“FCA”) signalled that the official sector would withdraw support for the LIBOR benchmark at the end of 2021. Since then, the transition from LIBOR to other chosen risk-free rates has occupied the derivatives, securities and loan markets.  Authorities around the world have grappled with possible methods by which they may help the market to transition away from LIBOR, especially in relation to the so-called “tough legacy” contracts–i.e., contracts that may not contain fallback arrangements for benchmark withdrawal or be easily amended.  In the U.K., HM Government introduced in October 2020, the Financial Services Bill 2019-21 (the “Financial Services Bill”), which grants powers to the FCA to help it manage the transition of these contracts.

The Financial Services Bill allows the FCA to “designate” a critical benchmark that has become or is at risk of becoming unrepresentative which would give rise to a prohibition on the use of that benchmark by U.K. supervised entities.  To supplement these provisions, HM Treasury is considering the possibility of introducing a legal “safe harbour” for legacy contracts so as to reduce the risk of contractual uncertainty and disputes in respect of legacy contracts referencing or relying upon a benchmark that has been designated as unrepresentative by the FCA. 

The FMLC has responded to HM Treasury’s Consultation on this topic, drawing attention to the legal uncertainties and the possibility of remote, if not negligible, risk of market disruption which may arise from LIBOR transition.  The Committee has expressed the view that safe-harbour legislation would address the worst-case risks of frustration, avoidance or force majeure termination which, although they may have only a small chance of crystallising, would be potentially significant in their impact owing to the systemic importance of market standard terms.  The letter also offers views on the scope of a safe-harbour provision, suggesting that such a provision tracks established approaches to this issue as closely as possible and draws attention in this regard to Article 68 of the BRRD.

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