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The much-anticipated Wheatley Review on reforming the London
interbank offered rate (LIBOR) was published this morning, 28
September 2012 .
The three key conclusions and recommendations are:
There is a clear case in favour of comprehensively reforming
LIBOR, rather than replacing it. The Wheatley Review concludes that
a transition to a new benchmark would pose an unacceptably high
risk of significant financial instability and risk large-scale
litigation between parties holding contracts that reference
LIBOR.
Transaction data should be explicitly used to support LIBOR
submissions.
Market participants should continue to play a significant role
in the production and oversight of LIBOR.
As anticipated, as part of the reform of LIBOR it has been
recommended that responsibility for LIBOR be transferred from the
British Bankers' Association (BBA) to a new administrator. It
therefore seems LIBOR will continue to exist, although it will be
administered by a new body.
The other point to note is that it has been recommended that the
number of currencies and tenors for which LIBOR is published be
reduced. Specifically, it is recommended that publication of all
LIBOR rates for Australian dollars, Canadian dollars, Danish
kroner, New Zealand dollars and Swedish kronor be discontinued. The
Wheatley Review suggests a six- to 12-month transition period for
the removal of these currencies. Facilities involving those
currencies will need to be carefully reviewed.
With regard to the impact on loan documentation, the issue
arises where express reference is made to the British Bankers'
Association LIBOR rate. This is the terminology used for example in
the London-based Loan Market Association's recommended form of
syndicated facility agreement. Although the document provides for
an alternative method for determining the interest rate, we would
expect that in the longer term, documentation changes will need to
be made in order to make proper reference to the new LIBOR
administrating authority.
The U.K. government has already indicated that the Wheatley
recommendations will be enacted through new parliamentary
legislation. It will be interesting to see if that legislation
includes a provision whereby all references to BBA LIBOR in English
law governed contracts will be treated as being a reference to the
new LIBOR. That would be an efficient solution for English law
governed contracts although it is not mentioned in the Wheatley
Review.
Concern also arises in relation to ISDA documentation. However,
comfort can be taken from the fact that while the Wheatley Review
recommends reform of LIBOR, it is also mindful of the need to avoid
causing financial instability or risking large-scale litigation
between parties holding contracts that reference LIBOR. It is in
the interests of all parties to arrive at a sensible solution that
causes as little upheaval to existing contracts as possible.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Risk and Regulation Monthly provides a summary of the key International, European and UK regulatory developments and pertinent regulatory activity affecting the Financial Services industry.
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