Malta: Clock Keeps Ticking For Libor

Last Updated: 6 June 2019
Article by Beppe Degiorgio

Most Read Contributor in Malta, July 2019

As I wrote in my article in the Times of Malta on 21 November 2017, the London Interbank Offered Rate, Libor, (which measures the cost of unsecured borrowing between banks for a specific period) is expected to be phased out by 2021 and given its widespread use, this is proving to be a gargantuan task.

The effort to extinguish Libor is driven mainly by regulators who favour benchmarks based on real trades rather than benchmarks based on banks' estimates, since the latter may be subject to bias and fraud; in fact recent scandals of benchmark rigging have lead to the imposition of hefty fines (approximately £1.5 billion in the UK in 2014) and even prison sentences in some instances.

The headache faced by the market in connection with the phasing out of Libor is, ironically, a product of Libor's success over its 30 year lifespan, since more than $370 trillion of deals around the global financial markets are tied to it and it is used as a benchmark for a plethora of products, from simple home mortgages to complex derivatives.

While Brexit seems to be "sucking much of the regulatory oxygen" in the UK and on the continent at large, and little has been done by European regulators to propose a concrete plan for life after Libor, market participants are still eager to find solutions to the problem of a life without Libor since, some participants worry that the transition costs may be bigger than those incurred because of Brexit. To this end, large magic circle law firms such as Linklaters have invested in AI robots in an attempt to find and fix Libor terms in clients' outstanding contracts; and the International Accounting Standards Board recently published an Exposure Draft Interest Rate Benchmark Reform which proposes exceptions to specific hedge accounting techniques in IFRS9 and IAS 39. In addition, on 16 May 2019, the International Swaps and Derivatives Association launched two consultations which aim to ease the problems that may be faced the period leading up to the extinction of Libor and beyond: the first sets out options for adjustments that will apply to the relevant risk-free rates (RFRs) if fallbacks are triggered for derivatives referencing, inter alia, USD Libor; the second relates to pre-cessation issues, and seeks comment on how derivatives contracts should address a regulatory announcement that Libor or certain other IBORs categorized as critical benchmarks under the EU Benchmarks Regulation are no longer representative of an underlying market.

In the US, the drive to find a solution to the eventual extinction of Libor is being driven by Alternative Reference Rates Committee (ARRC), being an initiative spearheaded by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York, (but with members including regulators (e.g. the S.E.C.), trade associations (e.g. ISDA), and other important market participants (e.g. Goldman Sachs)) which has the aim of developing alternative interest rate benchmarks, creating an implementation plan to support voluntary adoption of the alternative rate, and identifying best practices for contract robustness in the interest rate market. The ARRC has selected the Secured Overnight Financing Rate (SOFR) as an alternative rate to Libor.  The ARRC claims that SOFR is more resilient rate than Libor because of the way it is produced and the depth and liquidity of the markets that underlie it. In addition, given that SOFR is an overnight secured rate published each business day at approximately 8:00 a.m. Eastern Time (14:00 GMT+2), the ARRC claims that it better reflects the way financial institutions fund themselves today. Furthermore, in view of the fact that the transactions underlying SOFR regularly exceed $800 billion in daily volumes SOFR is claimed to be a transparent rate that is representative of the market across a broad range of market participants and protects it from attempts at manipulation.

In its effort to ensure a smooth transition from Libor to SOFR, the ARRC has set out a Paced Transition Plan with respect to the adoption of SOFR in the derivatives market. In so doing, the ARRC has developed, or is in the process of developing, contractual fallback language for a range of products such as bilateral business loans, floating rate notes, securitisations, and syndicated loans. This draft language may be used in new contracts that reference USD Libor to ensure these contracts will continue to be effective in the event that Libor is no longer usable.

The examples highlighted above are a clear indication of the market's concerted efforts to find workable solution to the problem of the extinction of Libor, which desire is propelled by a fear of disruption and litigation, which bring about unnecessary costs, and unwarranted stress.

A recent article in the Financial Times (1 May 2019) quoted Lech Walesa speaking about the risks of "unpicking decades of communism" to underscore the risks and difficulties of moving on from Libor – "it is easy to make fish soup from the aquarium with living goldfish, but just imagine what a challenge it is to try to make the aquarium with living goldfish out of the fish soup".  To my mind, the metaphor is apt, but market participants cannot shy away from the task, there is too much at stake – a solution must be found, and the sooner the better.

This article was first published in the Times of Malta, 5 June 2019.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions