Benchmarks LIBOR transition Amending the Benchmarks Regulation
As outlined in the previous sections, the FCA’s existing powers under the BMR are limited in a way that would prove unhelpful for LIBOR’s likely wind-down. The FCA has powers to deal with critical benchmarks that are at risk of becoming unrepresentative in order to restore their representativeness. The BMR also requires that an unrepresentative benchmark be ceased within a reasonable time period. As outlined above, however, there are circumstances in which it might not be possible to restore or maintain the representativeness of a critical benchmark. Furthermore, in such a situation, the benchmark’s sudden cessation could lead to risks of widespread claims of frustration and financial instability, particularly where there are "tough legacy" contracts.
	The Act amends the BMR to provide the FCA with additional powers to manage an orderly wind-down of a critical benchmark, such as LIBOR. The impacts of these changes are outlined in the following paragraphs.
	Amendments made by this Act expand the circumstances in which the FCA can conduct a formal assessment of a benchmark’s representativeness. Following a representativeness assessment, if the FCA considers that representativeness of a critical benchmark cannot reasonably be restored and maintained, or that there are not good reasons for taking steps to do so, the FCA will have the power to "designate" the benchmark.
	Once the FCA has designated a benchmark, it will have the power to require that the administrator changes the benchmark’s methodology, rules, or code of conduct. In the case of LIBOR, this could allow a change so that LIBOR is no longer reliant on panel bank submissions. Where the FCA exercises this power, it will also be required to carry out a review of this power at least every two years. It must also determine which provisions of the BMR should cease to apply to the administrator of a designated benchmark, where the FCA has exercised its powers to require that the administrator changes its benchmark’s methodology, rules, or code of conduct.
	The Act also grants the FCA powers to prohibit some or all use of a specific benchmark by supervised entities. Where the FCA designates a benchmark through the process described in paragraph 52, under the proposed amendments, all use of the benchmark will be prohibited once the designation comes into force in order to stop the pool of contracts referencing the benchmark from growing. The FCA will have the ability to postpone the prohibition on use by a period of up to four months, and will have the power to exempt "legacy use" of the benchmark from the prohibition (i.e. use of the benchmark in contracts and other instruments that pre-dates the prohibition imposed under Article 23B). The FCA will have discretion to specify the scope of any permitted legacy use and the length of the permission period. In the case of LIBOR wind-down, this could prevent contract frustration by permitting parties to "tough legacy" contracts to continue to use LIBOR.
	Where the administrator of a benchmark intends to cease provision of a benchmark, it is required to notify the FCA under the BMR. Under the existing BMR, the FCA can compel the administrator of a critical benchmark to continue publication of the benchmark until either it has been transitioned to a new administrator, it can be ceased in an orderly fashion or the benchmark is no longer deemed critical.
	The Act increases the maximum time period over which the FCA can compel the administrator of a critical benchmark to continue its publication from 5 years to 10 years, subject to annual reviews of this power. Subject to the FCA’s use of these powers, this would provide for LIBOR’s availability for tough legacy contracts exempted from the prohibition on its use for a longer period. The FCA will also have the power, where an administrator proposes to cease publication of a benchmark, to prohibit new use of that benchmark, with the same exemption powers for legacy use of the benchmark outlined in paragraph 54 for a "designated" benchmark.
	The Act also extends existing requirements under the BMR that administrators of all benchmarks must publish a robust procedure outlining the actions that they will take in the event of changes to, or the cessation of a benchmark. It gives the FCA the power to review and approve a critical benchmark administrator’s procedure.
	The amendments made by this Act require the FCA to issue statements of policy about the exercise of some of its new powers, including before the FCA directs a change in the methodology of a critical benchmark. The FCA is required to exercise some of the enhanced powers to advance its statutory objectives of securing an appropriate degree of consumer protection and/or protecting and enhancing the integrity of the UK financial system. The FCA may also consider international impacts before exercising some of its powers.
	The Act also provides for HM Treasury or the Secretary of State to make, by regulations, transitional, transitory or saving provisions in order to provide continuity with respect to decisions made or powers exercised by the FCA in accordance with the BMR before this legislation is commenced. This is to cater for a scenario where either a benchmark administrator informs the FCA of its intention to cease publication of a critical benchmark, or where contributors to the benchmark have notified the administrator of their intention to withdraw submissions to the benchmark before the relevant provisions in this Act are commenced.