LIBOR reform – month in review
March 2021 has shaped up to be quite an important month in the LIBOR transition journey, and we saw some significant pronouncements being made which will affect industry’s transition planning and approach. In all instances, we have seen an emphasis on providing certainty and clarity to industry in an attempt to accelerate transition efforts. Below are the most noteworthy.
FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks
In what has been hailed as a significant step in providing clarity on LIBORs ultimate cessation, the Financial Conduct Authority (FCA) has formally communicated LIBOR cessation dates to market on 5 March. This follows on from the feedback statement published by ICE Benchmark Administrator, the authorized administrator of LIBOR, which confirmed its intention to cease LIBOR publication as follows:
- For all tenors of EUR, CHF, JPY and GBP LIBOR, after December 31, 2021;
- one week and two month USD LIBOR after December 31, 2021; and
- all other USD LIBOR tenors (e.g., overnight, one month, three month, six month and twelve month) after June 30, 2023.
The FCA announcement covers the future cessation or loss of representativeness of the 35 LIBOR settings from the above mentioned dates. Very importantly, the FCA also announced its intention, for policy reasons, to potentially keep certain currencies and tenors of LIBOR available on a synthetic basis (ie without panel bank submission) post these dates under new proposed legislative powers. In these instances, LIBOR would not be available for use in new contracts, but for use in tough legacy arrangements only (those existing contracts referencing LIBOR that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended prior to the cessation date).
The March 5th announcement is not only critical in providing certainty around the timing of LIBOR cessation, but the announcement also fixes the spread adjustment under industry-standard documents, like ISDAs, as of March 5, 2021. This in turn provides greater certainty around the economic impact of the transition from LIBOR to risk free rates.
The FCA Statement can be accessed here
ISDA Guidance statement on FCA announcement
Following quickly on the heels of the FCA announcement, ISDA confirmed that the FCA statement represented an index cessation event under the IBOR Fallbacks Supplement and protocol, triggering a fixing of the fallback spread adjustment at the point of the announcement. This gives firms more information about the exact fallback rate that will be used in the event they don’t complete their transition efforts before cessation or non-representativeness occurs.
It is important to note that while the LIBOR spread adjustments were fixed at the point of the FCA announcement (5 March), the fallbacks only apply when each LIBOR setting ceases or becomes non-representative, which occurs at the dates mentioned above.
ISDA also published guidance describing how the terms of the ISDA 2020 IBOR Fallbacks Protocol and the IBOR Fallbacks Supplement apply to the FCA LIBOR announcement, as well as how the terms of the 2006 ISDA Definitions Benchmarks Annex to the ISDA Benchmarks Supplement apply to that announcement.
The ISDA guidance can be accessed here
Joint FCA and PRA “Dear CEO” letter
On 26 March 2021, the Prudential Regulatory Authority (PRA) and FCA published a joint “Dear CEO” letter advising firms that, with the publication of the FCA announcement, firms have entered the final and critical phase of LIBOR transition. In the letter the authorities expressed their expectation that the industry continues to build on work undertaken to date, and in some areas, accelerates efforts. The authorities further indicated that their expectation was that firms would continue working toward the milestones previously published (aligned to the priority action areas referenced in this letter) and did not expect that these would slip based on the FCA announcement extending LIBOR availability for some USD tenors. The authorities also put firms on notice that they would be intensifying supervisory focus on firms’ management and oversight of the risks associated with transition, and would use the supervisory tools available to them where required.
The joint letter can be accessed here
ARRC Commends Decisions Outlining the Definitive Endgame for LIBOR
The US Alternative Reference Rates Committee commended announcements by the FCA and IBA setting out the LIBOR cessation dates. In this statement, the ARRC emphasized its commitment to transition from USD LIBOR to SOFR, with no new USD LIBOR contracts by the end of this year and further time for legacy contracts to wind down (this is in line with supervisory guidance issued by US regulators encouraging market participants to move away from LIBOR as soon as practicable, and in any event by 31 December 2021, so as not to put the industry transition at risk).
The ARRC statement can be accessed here
Learn more about the LIBOR transition