It feels like a first date; the build-up has been happening for so long – and the final hour/s are now upon us. On the 5th of March 2021, the Financial Conduct Authority (FCA) in the United Kingdom set us on the path to our date with the cessation of the London Interbank Offered Rate (LIBOR) when it announced the dates of the future cessation or loss of representativeness of all 35 LIBOR settings currently published by ICE Benchmark Administration Limited (IBA).
This means that, as per the announcement, immediately after 31 December 2021, the following LIBOR settings will permanently cease: all 7 Euro LIBOR settings, all 7 Swiss Franc LIBOR settings, the Spot Next, 1-week, 2-month and 12-month Japanese Yen LIBOR settings, the overnight, 1-week, 2-month and 12-month Sterling LIBOR settings and the 1-week and 2-month US Dollar LIBOR settings. Overnight and 12-month US Dollar LIBOR settings will permanently cease to be quoted on 30 June 2023. This extension will provide some time relief to many South African entities with US Dollar denominated LIBOR exposures referencing these tenors.
ISDA made its own announcement off the back of the FCA announcement and confirmed that, “[T]oday's announcement constitutes an index cessation event under the IBOR Fallbacks Supplement and the ISDA 2020 Fallbacks Protocol for all 35 LIBOR settings. As a result, the fallback spread adjustment published by Bloomebrg is fixed as at the date of the announcement for all Euro, Sterling, Swiss Franc, US Dollar and Yen LIBOR settings”. This means that the fallbacks to the adjusted risk-free rates plus spread will automatically occur for the outstanding derivatives contracts that incorporate the IBOR Fallbacks supplement or are subject to adherence of the ISDA 2020 IBOR Fallbacks Protocol.
To recap, the ISDA Protocol provides a mechanism for parties to bilaterally amend their derivatives contracts to incorporate ISDA's fallback terms, providing a transition from US Dollar LIBOR to the secured overnight financing rate (SOFR) upon the occurrence of certain observable events. For US Dollar LIBOR that Index Cessation Effective Date occurred on Friday, 5 March 2021.
Bloomberg published its own announcement on 5 March 2021, containing a table of fixed spread adjustments for all LIBOR tenors across all currencies.
In that announcement the FCA made it known that it would use its powers to continue publishing 1-month, 3-month and 6-month US dollar LIBOR on a non-representative, synthetic basis for a further period after the end of June 2023.
Synthetic LIBOR has been on the cards since 23 June 2020 when HM Treasury announced that intended to bring forward legislation to amend the Benchmarks Regulation to give the FCA new and enhanced powers. These are powers that could help manage and direct an orderly wind-down of critical benchmarks (such as LIBOR). These proposed changes were intended to create a possible way of reducing disruption by enabling continued publication of a LIBOR rate using different and more robust methodology and inputs. The continued publication of LIBOR under a different methodology is known as synthetic LIBOR.
Market participants are reminded that, although publication of certain LIBOR settings on a synthetic basis would be intended to assist legacy contracts, new use of this synthetic LIBOR is quite obviously discouraged and in the UK (for example) will only open to UK supervised entities or all though legacy contracts. Though legacy contacts don't have an exact meaning are general considered to be those contracts that genuinely have no or inappropriate alternatives and no realistic ability to be renegotiated or amended. This could for example, include a bond where the issuer offers conversion calculated in line with market consensus on a fair fallback, and the bondholders don't reply or withhold their consent in an effort to push for terms that are out of line with these market standards.
The above announcements are likely to have implications under rate switch mechanics and, potentially, replacement of screen rate provisions in loan documents using the LMA standard if the relevant optional wording has been included in those provisions.
Information contained in this alert is for general education purposes only and should not be used as the sole source of information when analysing and resolving your LIBOR transition needs.
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.