LIBOR, COVID-19 and a proposal for a legislative fix

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management
• Financial services

09-06-2020

The FCA and Bank of England started 2020 with a clear message that when it came to transitioning away from LIBOR, “the time to act is now”.[1] With the unexpected arrival of COVID-19 has that position changed and is there any hope for a legislative fix to the problem?

COVID-19: Impact on LIBOR transition

Following the outbreak of COVID-19, the FCA, Bank of England and the Working Group on Sterling Risk-Free Reference Rate[2] (“Working Group”) issued a joint statement confirming that the target date for the end of 2021 for the cessation of LIBOR had not changed.

In April 2020, a further statement[3] was released. Whilst reaffirming that firms must prepare for the cessation of LIBOR at the end of 2021, it was acknowledged that current conditions mean the proposed complete transition away from LIBOR for all new sterling LIBOR linked loans by the end of Q3 2020 will likely not be possible and instead will continue into Q4 2020. The Working Group’s new target dates are considered here.

Call for a legislative fix

In May 2020, the Working Group’s Tough Legacy Taskforce (“Task Force”),[4] proposed that the UK consider introducing legislation to deal with tough legacy contracts which reference sterling LIBOR (and ideally other LIBOR currencies) which continue post end of 2021 and are governed by English law.

The Task Force notes “The case for action has been strengthened by the market impact of the COVID-19 pandemic. While the deadline for the market to be ready for the cessation of LIBOR by the end of 2021 remains the same, there is less time available in practice to meet it.”

The industry awaits the UK Government’s response to the proposal (and a separate proposal[5] by ARRC for the introduction of New York State legislation to deal with contracts which do not provide for LIBOR cessation).

However, the clock is steadily ticking towards the end of 2021. Moving LIBOR up the legislative agenda in the current financial and political landscape will not be easy. Even if legislation is introduced, it is unlikely to provide the complete solution and certainty that many will be hoping for and multiple litigation risks will remain.

Whilst legislation would be its preference, the paper also considers the possibility of a “synthetic methodology” for a wind down period. This would require either an administrator willing to modify the methodology for LIBOR and/or official sector invention to modify it. Such a solution would not be an easy fix (as it would not override the contractual agreement) and would remain open to legal challenge by those who “lost out” as a result.

Next steps

The Working Group, FCA and Bank of England will continue to monitor the impact of COVID-19 on LIBOR transition and further updates are expected later in the year. In the meantime, it would be safer for regulated firms to assume that there will be no legislative fix and continue to prepare accordingly. The message from the Task Force remains that firms should proactively remove LIBOR dependencies from their contracts before the end of 2021.

Eversheds Sutherland (International) LLP has a range of tools which can help identify and manage these risks. We welcome the opportunity to discuss with you the challenges that this transition away from LIBOR presents to your business.

[1]             “Next steps for LIBOR transition in 2020: the time to act is now”, Bank of England, 16 January 2020 https://www.bankofengland.co.uk/news/2020/january/next-steps-for-libor-transition-in-2020-the-time-to-act-is-now

[2]             “Impact of the coronavirus on firms’ LIBOR transition plans” FCA statement dated 25 March 2020, https://www.fca.org.uk/news/statements/impact-coronavirus-firms-libor-transition-plans

[3]             https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/rfr/rfrwg-further-statement-on-the-impact-of-coronavirus-on-timeline-for-firms-libor-transition-plans.pdf

[4]             “Paper on the identification on of Tough Legacy issues” dated May 2020  https://www.bankofengland.co.uk/-/media/boe/files/markets/benchmarks/paper-on-the-identification-of-tough-legacy-issues.pdf

[5]             Alternative Reference Rates Committee (“ARRC”) Press Release dated  6 March 2020, https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Proposed_Legislative_Solution.pdf