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FCA announcement triggers LIBOR endgame

  • United Kingdom
  • Banking and finance
  • Capital market law
  • Financial services and markets regulation
  • Investment funds and asset management

09-03-2021

On 5 March 2021, the UK Financial Conduct Authority (“FCA”) and the administrator of LIBOR, ICE Benchmark Administration (“IBA”) each made important announcements for parties to instruments or other contracts referencing LIBOR.

The FCA announcement

The FCA published an announcement in relation to the future cessation and loss of representativeness of each of the 35 LIBOR benchmarks that are currently published by the IBA.  In its announcement, the FCA confirmed the dates from which panel banks will no longer be required to submit to LIBOR. The FCA has urged market participants to continue with their LIBOR cessation plans and to ensure that transition from LIBOR is completed by the deadlines specified for each currency tenor.

Reflecting feedback in respect of the IBA consultation on cessation, the FCA confirmed that the 35 LIBOR tenors will cease to be provided or will no longer be representative from the dates set out in the table below.

Immediately after 31 December 2021

 

EUR LIBOR - all tenors

 

CHF LIBOR - all tenors

 

JPY LIBOR - all tenors

 

GBP LIBOR - all tenors

 

USD LIBOR - 1 week and 2 month

 

Immediately after 30 June 2023

 

USD LIBOR – overnight, 1 month, 3 month, 6 month and 12 month

One of the requests that the IBA received in response to its consultation was for confirmation that LIBOR rates would remain representative until the proposed cessation dates.  While not a guarantee, the FCA has reassured firms in its announcement that it does not expect LIBOR rates to become unrepresentative before the specified dates.

Tough legacy contracts

It has been acknowledged by the FCA that there will be a population of legacy LIBOR contracts for which transition to an alternative rate may not be possible.  The FCA has confirmed that it will consult[1] on using its enhanced powers under the EU Benchmarks Regulation, as on-shored into UK law (“UK BMR”), to require the IBA to continue to publish certain LIBOR tenors for an additional period after cessation using an FCA approved methodology (“Synthetic LIBOR”).  See our briefings: LIBOR: Are the FCA’s proposed new powers the answer to the problem? and UK regulation of derivatives to become less derivative for further information in relation to UK BMR and tough legacy contracts.  As a result, while the FCA announcement makes it clear that 26 of the above-listed tenors will cease to be published on the dates indicated, the publication of Synthetic LIBOR will be considered for the following nine LIBOR tenors:

GBP LIBOR

1 month

 

3 month

 

6 month

 

JPY LIBOR

1 month

 

3 month

 

6 month

 

USD LIBOR

1 month

 

3 month

 

6 month

 

In its announcement, the FCA made it clear that these nine tenors of LIBOR would no longer be representative after 30 June 2023 whether or not there was a determination to allow continued publication of a synthetic version of one or more of these tenors of LIBOR after that date.  The FCA reminded market participants that, if permitted, the publication of Synthetic LIBOR would be intended to assist parties unable to transition tough legacy contracts by 30 June 2023.  Synthetic LIBOR will not be available for new contracts because, as noted above, is the LIBOR rate that a synthetic version continues would be unrepresentative for the purposes of UK BMR.

In its announcement, the FCA reminded market participants that the publication of Synthetic LIBOR is intended to assist parties to tough legacy contracts.  Synthetic LIBOR will not be available for new contracts as the rate is unrepresentative for the purposes of UK BMR.

The FCA also published a series of statements of policy with respect to some of its enhanced powers under UK BMR.  The FCA’s statements of policy provide further detail in relation to the policy framework with respect of the new methodology for Synthetic LIBOR and a forward-looking term rate of the relevant risk-free rate plus a fixed spread aligned with the spreads in the ISDA fallbacks.

GBP LIBOR

We are quickly approaching the Working Group on Sterling Risk-Free Reference Rates (“Sterling Working Group”) end of Q1 2021 milestone date from which the initiation of (a) new and re-financed sterling LIBOR linked loans and (b) new sterling LIBOR linked linear derivatives (in both cases that expire after the end of 2021) must cease.

The recommendation of the Sterling Working Group is that parties should have actively converted legacy sterling LIBOR contracts (if conversion is possible – see above on tough legacy contracts) by the end of Q3 2021.

Although LIBOR publication continues until the dates set out above, this does not mean that parties can wait until the final quarter of 2021 to take action in respect of both new and legacy contracts.

ISDA 2020 IBOR Fallbacks Protocol

The publication of the FCA announcement is an “Index Cessation Event” for the purposes of the ISDA IBOR 2020 IBOR Fallbacks Protocol (“ISDA Protocol”) and Supplement 70 to the 2006 ISDA definitions (the “Supplement”).  Please see our guide in relation to the ISDA Protocol and Supplement for further information.

The technical notice published by Bloomberg Investment Services Limited, 5 March 2021 sets out the “Spread Adjustment Fixing Date” under the ISDA Protocol and Supplement for all tenors of LIBOR across all currencies.   The FCA announcement provides market participants with welcome certainty in relation to the fixed spread adjustments that will apply to fallback rates.

The FCA announcement does not trigger any specific notice requirements as between ISDA counterparties, unless otherwise agreed to in their documentation.  Specific notice provisions may be included in cash market fallback language and parties will need to determine whether such provisions require them to provide a notice in respect of the FCA announcement.  In particular, depending on contract language, administrative agents and direct lenders under existing loan agreements may be required to give notice of this event to borrowers and/or other members of the bank group.  Additionally, today’s announcement may have the effect under some loan agreements of triggering language which requires or allows the parties to amend the loan agreement to set a fallback interest rate. 

USD LIBOR

For the purposes of the ISDA Protocol and Supplement, the cessation of the 1-week and 2-month USD LIBOR tenors after 31 December 2021, will not trigger an Index Cessation Effective Date on that date.  Instead, the Calculation Agent will interpolate the relevant rate by using the next shorter and next longer tenors until such method is no longer available (i.e. once the remaining tenors used for interpolation cease to exist or become non-representative after 30 June 2023).   

The FCA announcement fixed the adjustment spread that will be added to the ISDA fallback rate for derivatives (i.e. compounded SOFR) to minimize, to the extent possible, any value transfer upon the transition under the ISDA Protocol and Supplement.  Furthermore, the ARRC announced on 30 June 2020, that it would be matching ISDA’s spread adjustments for non-consumer USD LIBOR contracts that have incorporated the Alternative Reference Rates Committee’s (“ARRC”) model hardwired fallback language.

The ARRC confirmed in a statement issued on 9 March 2021 that, under its recommended fallback language, which has triggers akin, but not identical, to the ISDA fallback provisions, the FCA’s announcement constitutes a “Benchmark Transition Event”.  The ARRC previously published a statement commending the FCA announcement.  The FAQs published by the ARRC provide further information in relation to the effect of the occurrence of a Benchmark Transition Event.

LMA Replacement of Screen Rate Clause

The publication of the FCA announcement may be a “Screen Rate Replacement Event” for the purposes of the UK Loan Market Association (“LMA”) template facility agreements. The implications will vary depending on the drafting used:

(a)          it could mean that amendments to replace LIBOR in a facility agreement can be made with Majority Lender consent rather than all Lender consent;

(b)          it may trigger good faith negotiations (either now or at a date later in 2021) to replace LIBOR;

(c)           there is a range of bespoke drafting in the loan market, particularly for bilateral loans, where there may be notification requirements or an amendment process triggered by the announcement.

It is worth flagging that the FCA announcement may not be an immediate Screen Rate Replacement Event. The LMA published a suggested pre-cessation trigger in October 2020, with the intention of picking up an FCA announcement, but this trigger will not be found in many facility agreements signed before that date (and there was no requirement for it to be added to facility agreements after that date). However, there may be other Screen Rate Replacement Events that could be apply as a result of the FCA announcement, for example the parties may agree that LIBOR is no longer appropriate for the purposes of calculating interest.

Loan market participants with LIBOR linked facility agreements need to consider their loan agreements in light of the FCA announcement to see what, if anything is triggered by the announcement. Even if the FCA announcement does not directly trigger an amendment or negotiation, it is a clear reminder that parties need to have a plan for active transition away from LIBOR.

How can Eversheds Sutherland assist?

Together with alternative legal and compliance provider Konexo, we can guide asset managers through all of the steps needed to transition from LIBOR to RFRs and wider benchmark reforms.

  1. Developing a strategy - Together Eversheds Sutherland and Konexo can work with you to develop project plans and offer strategic advice at each stage of the transition process.
  2. Keeping you updated - Eversheds Sutherland participates in numerous industry working groups and is therefore aware of the latest market developments.  We can also work with you to ensure that that you are up-to-date with product developments and industry documentation initiatives and trends.
  3. Training your team - We can offer tailored training to relevant teams within your business.
  4. Efficient tech solutions - The firm offers AI solutions as a cost and time efficient way of identifying references to IBORs within contracts.
  5. Helping you keep track - We can also develop reports to help firms track progress.
  6. Helping you communicate with your clients effectively - We can also develop a client communication strategy (including documentation that can be used for client education).
  7. Global cross-product coverage - Eversheds Sutherland has a global presence in all of the major financial markets across all major products (including cash and derivatives) and offers buy-side firms a joined up solution across all products.

If you would like to discuss any of the matters discussed in this article, please get in touch.


[1] With respect of USD LIBOR, consultation will be subject to considerations taking into account the views and evidence from US authorities and other stakeholders.