By Huw Jones
LONDON (Reuters) -Britain's financial watchdog set out plans on Wednesday for the temporary publication of 'synthetic' versions of Libor, the tarnished interest rate benchmark that is being largely scrapped at the end of December.
Once dubbed the world's most important number, the London Interbank Offered Rate or Libor is being ditched after banks were fined in 2012 for trying to manipulate the rate for pricing mortgages, loans and derivatives worth trillions of dollars across five currencies globally.
Most contracts using one of the 35 permutations of Libor are being switched to "risk-free" overnight rates compiled by central banks, such as Sofr from the U.S. Federal Reserve and Sonia at the Bank of England.
The Financial Conduct Authority on Wednesday set out plans for a 'synthetic' version of Libor for a narrow range of outstanding sterling and yen contracts that cannot be switched in time, which risks creating disruption in markets.
"The publication of a 'synthetic' rate for some sterling and Japanese yen Libor settings for a limited period will give market participants a bit more time to complete transition of legacy contracts," Edwin Schooling Latter, the FCA's director of markets and wholesale policy, said in a statement.
"We encourage firms to use that time well."
Libor rates are currently published by ICE Benchmark Administration and the FCA is using its powers to compel IBA to continue publishing one-, three- and six-month sterling and yen Libor rates in synthetic form from Jan. 4.
The FCA will decide and specify before year-end which legacy contracts are permitted to use these synthetic Libor rates for at least a year.
"Synthetic Libor will not be published indefinitely," the FCA said, adding that it will consider "progressively restricting" its use.
Lawyers said the FCA proposed a much wider than expected definition of "tough legacy" contracts that could use synthetic Libor, but noted the watchdog's hints that restrictions after 2022 were likely.
"Firms should carefully consider the regulator’s expectations here, and address any non-compliance promptly and appropriately. Not doing so runs the significant risk of further regulatory action," said Robin Penfold, partner at law firm TLT.
Only five dollar Libor rates will continue after December until the end of June 2023 for legacy contracts, as previously announced by the Federal Reserve.
The FCA said that allowing a synthetic rate for some sterling and yen Libor permutations does not mean a similar approach would be adopted for dollar Libor after June 2023.
(Reporting by Huw Jones; editing by Dhara Ranasinghe, Emelia Sithole-Matarise, Kirsten Donovan)