Critical Benchmarks (References And Administrators’ Liability) Act 2021

Policy background

LIBOR Transition

4. 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).
5. 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.
6. 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").
7. 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.
8. 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.
9. 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".
10. 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.
11. 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.
12. 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.

The Financial Services Act 2021

13. In order to address the risk that LIBOR cessation poses to tough legacy contracts, the Government has passed legislation as part of the Financial Services Act 2021 (the "FS Act 2021"). This legislation amended the BMR to provide the FCA with new and enhanced powers to oversee the orderly wind-down of a critical benchmark.
14. A detailed description of this legal framework is set out in paragraphs 43-51. Importantly, the BMR, as amended by the FS Act 2021, grants the FCA new powers to "designate" a critical benchmark, under Article 23A of the BMR, where it determines that the benchmark no longer accurately represents the underlying market or economic reality it seeks to measure or is at risk of no longer doing so, and the "representativeness" of the benchmark cannot or should not be maintained or restored.
15. Where the FCA "designates" a critical benchmark under Article 23A of the BMR, all use of that benchmark in financial contracts and instruments within the scope of the BMR is prohibited, once the designation comes into force. However, the FCA then have the power to allow certain tough legacy contracts that referenced the benchmark before its use was prohibited to continue to use the benchmark. This means that certain exempted tough legacy contracts will be able to continue using the benchmark after its designation.
16. Where the FCA "designates" a critical benchmark, it is also able to impose certain requirements on the administrator of that benchmark. This includes the power to direct the administrator of the benchmark to change how the benchmark is calculated (including to put in place a methodology that for example does not require panel bank submissions), the rules of the benchmark, or its code of conduct. The FCA also has the power to compel the administrator of a critical benchmark to continue publishing the benchmark for up to 10 years.
17. Taken together, these powers allow the FCA to provide for the continued publication of a critical benchmark for use in permitted contracts for a limited period of time. In the case of LIBOR, this would allow the FCA to compel continued publication of LIBOR using a revised methodology, known as "synthetic LIBOR", and permit certain legacy contracts to continue to use the benchmark in its synthetic form. The amended BMR also clarifies that the FCA may exercise these powers at the level of each version of a benchmark, meaning the FCA can determine whether or how to use its powers independently for each of the 35 LIBOR versions.
18. On 5 March 2021, the FCA announced 8 the dates on which all 35 LIBOR settings would either cease to be published or no longer be representative. The FCA has been clear that where it designates a benchmark and exercises its powers to require its continued publication under a revised methodology, the benchmark will be unrepresentative of the economic or market reality that it has previously measured. The intended wind-down plan for each LIBOR currency is set out in Table 1.

Table 1: Announced wind-down procedures for all LIBOR currencies.

LIBOR currency-tenor pair	Wind-down plan (as announced on 5 March 2021)
EURO	All settings will cease to be published immediately after end-2021.
Swiss Franc	All settings will cease to be published immediately after end-2021.
Japanese Yen	All settings will become unrepresentative at end-2021. On 24 June 2021, the FCA published a consultation on using its powers to provide for continuation of 1-month, 3-month and 6-month JPY LIBOR settings for 1 additional year, to end-2022.
GBP Sterling	All settings will become unrepresentative at end-2021. On 24 June 2021, the FCA published a consultation on using its powers to provide for the continuation of 1-month, 3-month and 6-month Sterling LIBOR settings.
US Dollar	1-week and 2-month USD LIBOR will cease to be published immediately after end-2021. All other USD settings will continue to be published using ongoing panel bank contributions until end-June 2023. The FCA will continue to consider the case for using its powers to provide for the continuation of certain USD LIBOR settings.

19. Following a public consultation, in March 2021, the FCA issued two statements of policy setting out whether and how it intends to exercise its powers under the BMR to designate a critical benchmark as an Article 23A benchmark and to require an administrator to change how a benchmark is calculated.
20. On 16 November 2021, the FCA set out which legacy contracts will be permitted to continue using LIBOR after it has been designated, and where the FCA has required the administrator to continue publication of the benchmark with a synthetic methodology.

Contractual uncertainty and dispute

21. Following publication of the Bill for the FS Act 2021, HM Treasury received feedback from market participants that further action is necessary in order to minimise the risk of market disruption and to protect users of a benchmark where the FCA exercises its powers under the BMR to wind-down a critical benchmark. During the passage of the FS Act 2021 9 , the Government committed to explore this further.
22. In February 2021, HM Treasury published a consultation 10 seeking views on the case for additional legislation to provide legal certainty for parties that will continue to rely on a critical benchmark after the FCA has exercised its powers to provide for the orderly wind-down of that benchmark.
23. As HM Treasury noted in its response to the consultation 11 , after careful consideration of consultation responses, the Government determined that it was appropriate to bring forward further legislation to address issues identified in the consultation. Responses to HM Treasury’s consultation focused on the LIBOR benchmark, which is currently the only critical benchmark that is administered in the UK. Responses suggested that, without legislative clarity, parties may be uncertain of, or contest, the continued application of LIBOR to their contract after the FCA has exercised its powers to designate the benchmark under Article 23A of the BMR and require its continued publication using a synthetic methodology. Respondents raised concerns that this could result in parties ceasing to perform their contractual obligations, legally challenging the enforceability of the contract, or bringing claims against contractual counterparties or third parties which continue to apply the synthetic form of LIBOR to the contract.
24. Where there is either uncertainty or dispute over the continued application of LIBOR to tough legacy contracts, this could generate significant financial costs for contractual parties, including consumers. Where such disputes arise, they may also serve to reduce market confidence in the continued use of LIBOR in tough legacy contracts. If parties to tough legacy contracts are reluctant to continue to apply LIBOR as amended to their contracts, this would pose a real risk to the orderly wind-down of the benchmark, and relatedly, the integrity of UK financial markets.

Supporting the orderly wind-down of a critical benchmark under Article 23A of the BMR

25. In order to support the orderly wind-down of a critical benchmark, such as LIBOR, this Act provides legal certainty as to how contractual references to a critical benchmark should be interpreted where the FCA exercises specific powers under the BMR to oversee the wind-down of the benchmark. The purpose of this legislation is to ensure that the powers provided to the FCA in the FS Act 2021 operate effectively, and in particular that where the FCA exercises its powers to provide for the continuity of certain LIBOR settings, parties to tough legacy contracts are able to continue to apply LIBOR to their contracts with confidence. The provisions, as described below, are also intended to ensure the application of a synthetic methodology to a benchmark does not inadvertently give rise to breach of contract claims or provide a vehicle for one party to claim that the contract has been frustrated. They are designed to enable contracts to continue undisturbed once a benchmark is designated under Article 23A.
26. This Act inserts new Article 23FA into the BMR which clarifies that references to a designated "Article 23A benchmark" should continue to be interpreted as references to that benchmark after the FCA has exercised certain powers under the BMR. For example, in the case of LIBOR, this Act provides certainty that contractual references to LIBOR should continue to be treated as references to that benchmark where the FCA has directed a change in how LIBOR is calculated, i.e. synthetic LIBOR.
27. It also provides that, in respect of an Article 23A benchmark, where parties have referenced a benchmark in a contract before this Act comes into force or before the benchmark is designated as an Article 23A benchmark, the contract will be treated as if it has always provided for the reference to include the benchmark, notwithstanding changes resulting from the exercise of the FCA’s powers, such as a change in the methodology of LIBOR.
28. This provides parties with clarity that, unless the contract provides otherwise, an Article 23A designation of the benchmark under the BMR, and any subsequent changes to the benchmark imposed by the FCA, do not in themselves provide grounds for contracting parties to argue that use of the synthetic benchmark is a breach of contract, that there has been a material change to the contract, or that the contract has been frustrated.
29. Article 23FA and Article 23FB apply to any reference to a critical benchmark that is designated under Article 23A of the BMR, however that reference is expressed. This extends beyond the definitions of "use" of a "benchmark" as defined in Article 3 of the BMR to references to the benchmark in all contracts and other arrangements.
30. This Act also makes clear that in respect of an Article 23A benchmark, where a contract or other arrangement includes a fallback clause to operate by reference to something other than the benchmark in question, Article 23FA does not prevent or affect the operation of that fallback clause. The intention of this provision is to not override those contracts which have provided for alternative arrangements to be triggered either before or during LIBOR’s wind-down. However, this Act clarifies that where a contract or arrangement has a fallback clause that is triggered by the cessation or unavailability of the benchmark in question, these clauses would not be triggered where the FCA uses its powers under the BMR to provide for the continued publication of the benchmark with a revised methodology i.e. synthetic LIBOR.

Administrator Protections

31. HM Treasury’s consultation also explored the case for additional legislative protections for the administrator of a critical benchmark designated by the FCA under Article 23A of the BMR. The administrator is responsible for the calculation of a benchmark and its publication. Stakeholders have identified the risk that parties may look to contest the continued publication of an Article 23A benchmark by its administrator or seek damages against the administrator for doing so.
32. As set out in paragraph 45, under the BMR the FCA has the power to compel the administrator of a critical benchmark to continue to publish that benchmark under specific circumstances. The FCA also has the power to designate the benchmark under Article 23A of the BMR and to impose requirements on the benchmark administrator under Article 23D(2), relating to the methodology, rules, or code of conduct of the benchmark. The continued publication of the benchmark by an administrator is therefore necessary for the orderly wind-down of a benchmark under Article 23A of the BMR.
33. Responses to HM Treasury’s consultation indicated that the administrator could be subject to litigation for action or inaction it takes in accordance with requirements imposed by the FCA to continue publication of an Article 23A benchmark using a revised methodology. Where the administrator of an Article 23A benchmark is subject to legal challenge for complying with statutory requirements imposed by the FCA under the BMR, it could impose a significant and unmerited burden on the administrator of an Article 23A benchmark. Such action could also serve to undermine parties’ confidence in using the benchmark, undermining the operation of the FCA’s powers to oversee an orderly wind-down of the benchmark.
34. While Annex 4 of the BMR, inserted by the FS Act 2021, allows the FCA to modify the statutory requirements imposed by the BMR in relation to Article 23A benchmarks, including on the administrator of an Article 23A benchmark (see paragraph 52), it does not prevent claims from arising against the administrator on the basis of actions that it is required to take in respect of the benchmark. Consequently, this Act inserts Article 23FC into the BMR, which grants the administrator of an Article 23A benchmark immunity from claims for damages in certain circumstances. Specifically, it provides that the administrator of an Article 23A benchmark is not liable in damages where it takes action or inaction in accordance with requirements imposed by the FCA under paragraph 2 of Article 23D. In the case of LIBOR wind-down, this would protect the administrator from claims of damages where it was acting in accordance with the FCA’s direction to calculate LIBOR using a synthetic methodology. It also protects the administrator where it publishes the benchmark as calculated in accordance with those requirements.
35. The protections afforded to the administrator by Article 23FC do not provide the administrator of an Article 23A benchmark with immunity where it does not act in accordance with requirements imposed upon it by the FCA, or where it exercises a discretion conferred upon it by the FCA, or a discretion as to the time or manner of the benchmark’s publication.