I cannot give the hon. Gentleman a precise figure. However, in my remarks now and further on, I will give an explanation of those that are excluded and therefore necessitate the creation of this synthetic rate. If he would just bear with me, I will get to the point, and he should feel free to intervene subsequently if he is not satisfied.
The Bill builds on the provisions of the Financial Services Act 2021, as I mentioned a moment ago. This provided the FCA with the powers to effectively oversee the cessation of a critical benchmark in a manner that protects consumers and minimises disruption to financial markets. If I may, I would like to take a few minutes to put the Bill into context.
LIBOR seeks to measure the cost that banks pay to borrow from each other in different currencies and over various time periods. It is calculated using data submitted by a panel of large banks to LIBOR’s administrator, which is the ICE Benchmark Administration. It is referenced in approximately $300 trillion of contracts globally. It is used in a huge volume and variety of contracts, including in derivatives markets, mortgages, consumer loans, structured products, money market instruments and fixed income products. For example, a simple loan contract may say that the interest payable is LIBOR plus 2%. In this example, LIBOR represents the cost to the lender of getting access to the money to lend it out, and the 2% represents the additional risk to the lender associated with making the loan.
Back in 2012, it emerged that LIBOR was being manipulated for financial gain. Following the subsequent Wheatley review, LIBOR came under the regulatory jurisdiction of the FCA in 2013. That led to significant improvements to the regulation and governance of LIBOR. However, in 2014 the G20’s Financial Stability Board, known as the FSB—not to be confused with the Federation of Small Businesses—declared that the continued use of such rates, including LIBOR, represented a potentially serious source of systemic risk. The FSB said that financial markets should voluntarily transition towards the use of more robust and sustainable alternatives. It reached that conclusion due to the structural decline in banks borrowing from each other through the unsecured wholesale lending market. That has meant in turn that LIBOR has become more and more reliant on expert judgments, rather than based on real transaction data. In other words, the market that this systemically important benchmark seeks to measure increasingly no longer exists, which underscores the fundamental need to transition away from LIBOR.
Since the FSB’s recommendation, the Government, the FCA and the Bank of England have worked together to support a market-led transition away from use of the LIBOR benchmark. Primarily, they have encouraged contract holders voluntarily to move to robust alternatives, in accordance with guidance from the FCA and the Bank of England, before the end of the year. At the end of the year, LIBOR’s panel banks will stop making the submissions to the administrator on which LIBOR is based. At that point it will therefore become unrepresentative, and the administrator will cease publishing in any setting where the FCA has not required continued publication using the synthetic methodology. The vast majority of contracts are expected to have transitioned away from LIBOR before that happens. For example, it is estimated that 97% of all sterling LIBOR referencing derivatives will have transitioned by the end of the year.
Despite extensive work and progress, there remains a category of contracts that face significant contractual barriers to moving away from LIBOR by the end of the year, and measures in the Financial Services Act 2021 sought to provide a safety net for those so-called tough legacy contracts. Through the Act, the Government granted the FCA powers to designate a critical benchmark as unrepresentative, if it determines that the benchmark is, or is at risk of becoming, unrepresentative—in other words, that it no longer accurately represents what it seeks to measure—and that it is not possible or desirable to restore its representativeness. The Act also provided the FCA with powers to compel the administrator of such a designated benchmark to continue to publish it for a temporary period of up to 10 years, to prohibit new use of the benchmark, and to require the administrator to change how the benchmark is calculated.