in case you thought it was safe to go away for Thanksgiving and not worry about LIBOR transition, think again. The Financial Conduct Authority, the regulator of US dollar LIBOR across the pond, reminded us that we are all still dependent upon them until the complete switch is made to SOFR or another rate.
On the Wednesday before Thanksgiving, the FCA issued its consultation on their consideration of a proposal to require publication of 1-, 3- and 6-month US dollar LIBOR on a synthetic basis for “a short period of time” until the end of September, 2024. Just to confirm, the consultation paper reiterates that this would only apply to legacy loans- synthetic LIBOR would not be considered representative for purposes of allowing new LIBOR loans, and it would not apply to cleared derivatives. Comments are requested by January 6, 2023. Based on prior consultations, results will likely appear later in Q1, or Q2 2023.
The consultation contains a detailed discussion of the considerations in determining whether, and to what extent, synthetic LIBOR should be allowed, and how it should be calculated. As noted in the consultation, an additional 15 month period of time to allow legacy loans to expire on their own can help ease the transition for borrowers and lenders. A potential drawback is that lenders would have to continue tracking and using LIBOR alongside SOFR or other rates until all of their loans are transitioned or expire. Even if this is not a major burden, it still makes sense to transition to replacement rates where possible. One way or another, LIBOR will eventually cease.