Critical Benchmarks (References and Administrators’ Liability) Bill [HL]

On 13 October 2021, the House of Lords is scheduled to debate the second reading of the Critical Benchmarks (References and Administrators’ Liability) Bill.

The aim of the bill is to reduce the scope for uncertainty and litigation arising from the withdrawal of a key interest rate which is used as a ‘benchmark’ in the UK financial system.

Benchmarks are indices used to work out amounts payable in contracts (usually financial ones). A ‘critical benchmark’ is one that is considered particularly important because of its wide use. In the UK, the only critical benchmark is the London interbank offer rate (LIBOR).

The Bank of England has stated that the calculations underlying LIBOR are increasingly unreliable, creating a systemic risk to the UK economy. Therefore, it has been working with other regulators and market participants to transition away from LIBOR. However, some contracts will face significant barriers to moving away from LIBOR. These are known as ‘tough legacy’ contracts.

The Financial Services Act 2021 amended the regulations governing benchmarks to deal with the wind-down of a critical benchmark and to manage tough legacy contracts. The changes granted the Financial Conduct Authority (FCA) certain powers, such as prohibiting new contracts from using the benchmark and prescribing how the index calculation is made.

The bill’s provisions would add further measures to the benchmark regulations that are intended to:

• provide greater legal certainty that tough legacy contracts can continue to operate using the designated benchmark; and
• grant the administrator of the designated benchmark immunity from legal action where it takes actions because of requirements imposed by the regulator. 

The Government states that reducing legal disputes related to the wind-down of LIBOR should result in lower costs for firms and lessen the risk that disputes undermine an orderly wind-down, which could in turn impact the stability of the UK financial system.