Benchmarks LIBOR transition
Benchmarks are indices that are used in a wide range of markets to help set prices, measure performance, or work out amounts payable under financial contracts. They play a key role in the financial system’s core functions of allocating capital and risk.
	Major interest rate benchmarks, such as LIBOR, EURIBOR and TIBOR (generically known as the "IBORs"), are widely used in the global financial system for a large volume and broad range of financial products and contracts.
	LIBOR seeks to measure the average costs at which banks can borrow from the unsecured wholesale lending market. It is produced by ICE Benchmark Administration Limited (IBA) and is calculated based on submissions that are made to IBA each day by a number of major global banks (the "panel banks"). They use a methodology which requires, to the greatest extent possible, submissions to be based on (or derived from) actual transactions (the rates at which panel banks have been able to borrow in certain currencies over particular time periods) and the expert judgement of the panel banks, which is to be used only when sufficient prescribed data are not available.
	LIBOR is internationally available and systemically important. It is available in five currencies (Sterling, US Dollar, Swiss Franc, Euro and Japanese Yen). LIBOR is published over seven time periods (known as tenors), ranging from overnight up to one year. These five currencies and seven tenors are paired to form 35 individual LIBOR rates.
	As of April 2021, it is estimated that approximately US$265 trillion of financial contracts globally reference LIBOR. The vast majority of exposure to LIBOR is in the derivatives markets, but these also include mortgages, consumer and commercial loans, structured products, money market instruments, and fixed income products.
	The FCA has regulated LIBOR since 2013, initially under FSMA and subsequently under Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (the EU Benchmarks Regulation or EU BMR). The EU BMR aims to ensure the accuracy, robustness and integrity of financial benchmarks, providing market participants with confidence in the benchmarks they use. The EU BMR places requirements on administrators, supervised entities, and supervised contributors (see paragraphs 250–252) to benchmarks relating to governance, transparency and methodology requirements.
	Following the end of the Transition Period, the EU Regulation forms part of retained EU law and therefore continues to apply in the UK, with the necessary changes made under the EUWA to ensure that it operates effectively following the end of the Transition Period. The EU Regulation as amended and forming part of retained EU law in the UK is referred to as the Benchmarks Regulation (BMR).
	As a result of its use in a significant volume of transactions LIBOR is classified and regulated as a ‘critical benchmark’ under the BMR (see paragraphs 253-254 for more detail). The cessation of a critical benchmark, such as LIBOR, could incur financial losses to consumers and impact market stability if not managed appropriately. The BMR therefore gives the FCA the power to mandate administration of a critical benchmark in order to ensure its orderly wind-down and prevent threats to market integrity, financial stability, consumers, the real economy, or the financing of households and businesses.
	The BMR stipulates that a benchmark needs to be ‘representative’ of the underlying market or economic reality that it is intended to measure. Withdrawal of submissions from contributors could undermine the ability of a critical benchmark to reflect its underlying market or economic reality. The regulation therefore gives the FCA power to mandate contribution from supervised entities to a critical benchmark in order to maintain the representativeness of the benchmark.
	In 2014, in response to cases of attempted manipulation of IBORs and the decline in liquidity in interbank unsecured funding markets, the Financial Stability Board (FSB) made clear that continued use of major interest rate benchmarks such as LIBOR represented a potentially serious source of systemic risk. This is because the underlying market that these rates intend to measure is no longer sufficiently active and panel banks are increasingly reliant on ‘expert judgement’ for submissions. The FSB recommended a long-term transition away from IBORs , with regulators signalling that firms should use alternative "Risk-Free Rates."
	In 2017, the FCA secured voluntary agreement from the LIBOR panel banks to continue making contributions to the rate until the end of 2021. The FCA has publicly stated that, after 2021, it is not minded to use its current regulatory powers to compel panel banks to continue contributions. This means that from the end of 2021 panel banks will be free to cease their contributions to LIBOR if they wish to do so.
	In the absence of compulsion by the FCA to ensure panel banks continue contributing to LIBOR, there is a heightened risk that LIBOR will be found unrepresentative as a result of panel bank withdrawal. In this scenario, there is a strong possibility that LIBOR could cease to exist in its current form at the end of 2021 or shortly thereafter. This would likely leave parties to contracts which determine payments by reference to LIBOR without a workable means of determining those payments.
	However, the BMR does not currently provide the FCA with the appropriate powers necessary to manage the orderly ‘wind-down’ of a critical benchmark, such as LIBOR, before its eventual cessation, where the benchmark has become unrepresentative and it will not be practical or desirable to restore its representativeness.