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 predominantly under financial contracts. They play a key role in the financial system’s core functions of allocating capital and risk. Critical benchmarks, as defined in the BMR, are those benchmarks that are the most systemically important and widely used across the economy (see paragraph 40).
	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 is an internationally available and systemically important interest rate benchmark which seeks to measure the average costs at which banks can borrow from the unsecured wholesale lending market. It is used as a reference rate in a wide variety of contracts. The vast majority of these are in the derivatives markets, but it is also used in mortgages, consumer and commercial loans, structured products, money market instruments, and fixed income products. LIBOR is available in five currencies (Sterling, US Dollar, Swiss Franc, Euro and Japanese Yen) and 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 "versions", which are published each business day by its administrator, the ICE Benchmark Administration Limited ("IBA").
	LIBOR is currently the only benchmark that is designated as a critical benchmark under the BMR. As of April 2021, it is estimated that approximately US$300 trillion of financial contracts globally reference LIBOR.
	To calculate LIBOR, the IBA uses submissions made each business day by a number of major global banks (the "panel banks"). It uses 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 different periods of time). The IBA provides a ‘waterfall methodology’ 1 that sets out the basis for calculating these submissions, with panel bank expert judgment only used when sufficient prescribed data are not available.
	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 judgment for submissions. The FSB recommended a long-term transition away from IBORs, with regulators signaling 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. Since then, the Bank of England and FCA have consistently encouraged firms to transition away from LIBOR to alternative reference rates, working with the industry-led Working Group on Sterling Risk-Free Reference Rates (UK RFRWG). Comprehensive lists of announcements and publications are available from the Bank of England 2 , the FCA 3 , and the UK RFRWG 4 . HM Treasury have reinforced the importance of active transition 5 and worked closely with the regulators to encourage a market-led transition.
	The FCA has publicly stated that after 2021 it will not use its current regulatory powers to compel panel banks to continue submitting contributions to LIBOR’s administrator. In March 2021, LIBOR’s administrator confirmed its intention to cease publication 6 of all Sterling, Japanese Yen, Euro and Swiss Franc LIBOR settings, and two US Dollar LIBOR settings, at the end of 2021. The FCA confirmed that 7 , unless it exercises the powers available to it under the BMR, these LIBOR settings will cease to be published at the end of 2021. The remaining five USD LIBOR settings will continue to be published based on panel bank submissions until end-June 2023.
	The cessation of a critical benchmark, such as LIBOR, could incur financial losses to consumers and impact market stability if not managed appropriately. The cessation of certain LIBOR rates after the end of 2021 would pose a particular problem for those contracts that run beyond the end of 2021, but which cannot transition away from LIBOR, for example due to constraints within their contracts. Some contracts, particularly in cash markets (i.e. loans, securitisations, mortgages and commercial contracts), face significant barriers to moving off LIBOR and as such transition is not a realistic prospect. These contracts are called "tough legacy" contracts. Some LIBOR-referencing non-financial contracts, such as leases, face the same problems.