The FCA has decided to extend publication of some US dollar LIBOR rates for an extra 15 months, so-called ‘synthetic LIBOR’. The move is recognition of the difficulties of the transition from LIBOR.

After consultation, the FCA has decided to “continue the publication of the 1-, 3- and 6-month US dollar LIBOR settings for a short period after 30 June 2023, using an unrepresentative ‘synthetic’ methodology (‘synthetic US dollar LIBOR’)”.

Overnight and 12-month US dollar LIBOR settings will cease to be published after June 30, 2023.

The FCA added in its statement: “Synthetic LIBOR is only a temporary bridge, and synthetic settings will not continue simply for the convenience of those who could have transitioned their contracts but have not done so.”

Calculating the rate

The regulator has decided to calculate synthetic LIBOR “using the relevant CME Term SOFR Reference Rate plus the respective ISDA fixed spread adjustment”.

SOFR (Secured Overnight Financing Rate) is the replacement for LIBOR, but according to the Financial Times “a large proportion of the $14trn US ‘junk’ loan market had not yet switched to LIBOR’s replacement”.

LIBOR underpins more than $300trn in derivatives and other instruments, but its credibility was seriously damaged when it emerged banks had manipulated the rate.

There is considerable debate about what the right terms for switching away from the LIBOR benchmark are. The FCA’s view is that announcing this temporary extension will “avoid a disordely cessation”.