FCA moots synthetic Libor as rates fallback
Once Libor is allowed to die, replacement could be risk-free rate plus fixed credit spread
Existing derivatives contracts could be amended to reference a synthetic Libor rate should the benchmark cease to be produced after 2021, according to Andrew Bailey, chief executive of the UK’s Financial Conduct Authority (FCA). The fallback rate would be created by adding a credit component onto a dynamic, risk-free rate – potentially helping to avoid a sharp transition if Libor is abandoned.
Banks have agreed to continue participating in Libor-setting panels until that point – and the FCA has
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