Earlier this year, on June 23, 2020, the U.K. Treasury announced its intention to bring forward legislation amending the Benchmarks Regulation (“BMR”) in order to afford the Financial Conduct Authority (“FCA”) new and enhanced powers to facilitate the run-down of tough legacy contracts referencing LIBOR. That legislation was introduced to the House of Commons on Oct. 21, 2020 in the form of the draft Financial Services Bill (“Bill”). The Bill amends many aspects of the United Kingdom’s existing financial regulation framework (with the expectation that it will take effect at the end of the Brexit transition period) and is currently scheduled to receive its second reading in the House of Commons on Nov. 9, 2020, at which stage it may be subject to further amendment before passing through the House of Lords, receiving Royal Assent and entering into force.
In line with the Treasury’s June statement, the amendments to the BMR introduced by the Bill anticipate a synthetic LIBOR solution to the tough legacy contracts issue — the FCA shall have the authority to designate as an “Article 23A benchmark” any critical benchmark which it considers unrepresentative (and reasonably incapable of being restored or maintained) or at risk of becoming unrepresentative. Amongst other powers, the FCA will have the ability to:
- Compel any administrator of an Article 23A benchmark to modify the benchmark (directing how it is determined and the relevant input data to be used) and extend its publication for a period of up to 10 years;
- Prohibit supervised entities from using the Article 23A benchmark; and
- Grant at its discretion exemptions permitting use of the benchmark in the case of tough legacy contracts that cannot transition to an alternative benchmark.
While the Bill’s provision of a limited safeguard against a transition cliff-edge scenario is a welcome one, it does not specify the circumstances in which the tough legacy contracts exemption may be applied; the FCA will be required to provide this clarification by way of a policy statement prior to the exercise of any such powers.