UK watchdog orders publication of ‘synthetic’ dollar Libor rate

The UK financial watchdog has ordered that some Libor rates continue to be published beyond the original June deadline, giving market participants more time to shift away from the tainted lending benchmark.

The Financial Conduct Authority said on Monday that synthetic versions of the one, three and six-month US dollar Libor rates would continue to be published “for a short period” after the original June 30 cut-off point — before ending for good in September 2024. Synthetic Libor attempts to mimic what Libor would have been, if it had continued to exist.

The regulator’s decision, which follows a consultation last November to gauge views on a synthetic rate, is the latest sign of how extensive and complicated the transition process has proved. A large proportion of the $1.4tn US “junk” loan market had not yet switched to Libor’s replacement, the Secured Overnight Financing Rate, with just months to go at the start of this year.

US dollar Libor was used for decades to price various debt and derivative products around the world and became key to multiple manipulation and price rigging scandals since the global financial crisis, with several traders facing criminal charges.

The US leveraged loan market — which typically refers to low-grade loans with floating interest rates, issued by companies with large debt piles — has been a battleground for the transition away from the Libor benchmark because of disagreement over the appropriate terms of switching.

The biggest buyers of US leveraged loans are vehicles called collateralised loan obligations (CLO), which own roughly two-thirds of the market. Some CLO investors have pushed for an additional “credit spread adjustment” to account for the lack of risk premium factored in to the new Sofr rate, owing to differences in the way the two benchmarks are constructed.

The FCA said “a small but material subset of contracts” would not be able to transition away from US dollar Libor by the previously announced end date of June 30, and that a temporary extension “may help market participants to transition . . . and thus avoid a disorderly cessation.”

“Synthetic Libor is only a temporary bridge,” the FCA said, adding that it “will not continue simply for the convenience of those who could have transitioned their contracts but have not done so.”

All “legacy contracts except cleared derivatives” can continue to use the three agreed Libor rates, the regulator said.

The FCA said on Monday that the extra 15 months of synthetic Libor publication gives users plenty of time to shift to an alternative rate and that any outstanding exposures beyond September 2024 “may be due to parties to contracts having made a conscious choice not to transition, or having failed to take steps to transition in a timely manner.”

The FCA has already extended publication of some synthetic sterling Libor rates beyond the December 2022 deadline.