LIBOR transition continues apace in 2021, with the Financial Conduct Authority (FCA) confirming earlier this month that administrators will not provide LIBOR settings/tenors and that LIBOR will be a non-representative interest rate benchmark:
- After 31 December 2021 - for all GBP, EUR, Swiss franc and Japanese yen settings, and the one week and two month USD settings
- After 30 June 2023 - for all remaining USD settings
LIBOR settings will not be published after these dates either. This means that market participants now have nine months to remove their remaining reliance on these benchmarks. At the same time, ISDA confirmed the cessation announcement would trigger the fixing of the "spread adjustments" to be used in its LIBOR fallbacks.
You can read the full announcement from the FCA here.
Q1 2021 Deadline - what does it mean?
The Working Group on Sterling Risk-Free Reference Rates (WG) has recommended that from 1 April 2021 funders:
- Do not issue any new sterling LIBOR linked loans and other financial products maturing after the end of 2021
- Make sure that they have identified all legacy sterling LIBOR linked contracts
The guidance confirms that from tomorrow any new transactions should reference a risk-free rate (RFR) from day one rather than sterling LIBOR (with the relevant rate switch wording). This means that funders should be ready to ensure that any new transactions can be priced, documented, administered and, if required, hedged using a RFR.
The Sterling Overnight Index Average (SONIA) is likely to be used (especially for larger syndicated deals) but funders may use other RFRs such as the Bank of England base rate (typically used for smaller bilateral deals).
Refinitiv release Term SONIA benchmark
As mentioned in our September 2020 article, Refinitiv previously announced the launch of a prototype forward-looking term SONIA reference rate which would be published daily prior to noon (UK time) and available in one month, three month and six month tenors. This prototype was in addition to beta forward-looking term rates published by FTSE Russell and ICE Benchmark Administration. In January 2021, Refinitiv announced its plan to launch the Refinitiv Term SONIA benchmark on the back of the prototype's success.
However, the WG has previously confirmed that backward-looking SONIA compounded in arrears is the preferred alternative to LIBOR for the wholesale markets at present. This suggests that term SONIA rates may be of limited use to market participants.
For those readers looking for an even more comprehensive explanation of the LIBOR transition including recent developments, as well as the reasoning for the transition in the first place, the Bank of England (together with the WG) has released a further series of factsheets, bite size educational videos and webinars and speeches (links to the educational guides and resources are available here).
Andrew Dodds, a partner in the banking and finance team at Stevens & Bolton comments that:
"Both the Q1 and end of 2021 deadlines are important steps in the LIBOR transition. It is imperative that lenders, borrowers and other market participants continue to actively participate and take the necessary action to make sure they are fully ready for LIBOR's disappearance at the end of this year".
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