The Financial Conduct Authority (FCA) announced today that LIBOR will officially no longer be published by ICE Benchmark Administration (IBA) or regulated by the FCA. The timing of LIBOR cessation is as follows:
- Immediately after Dec. 31, 2021, in the case of all sterling, euro, Swiss franc, and Japanese yen settings, and the one-week and two-month U.S. dollar (USD) settings; and
- Immediately after June 30, 2023, in the case of the remaining USD settings.
Today's announcement also substantiates the prior thought that most USD LIBOR tenors will continue past year-end 2021 for legacy contracts. However, U.S. banking regulators previously stated that LIBOR may not be used on originating loans after Dec. 31, 2021. Furthermore, the International Swap and Derivatives Association (ISDA) published spread adjustments by Bloomberg today.
This announcement coupled with other statements from regulators have made it clear that LIBOR is ending and that users of LIBOR need to continue transitioning away from its use and move to an alternative benchmark. For lenders, this announcement may mean that a trigger event has occurred under its loan documents. This could mean that a lender must begin sending out notice of this event to its borrowers that are affected. Lenders must review the language within their documents to know what steps are required of them based upon this announcement.
A Bit of Background
The London Interbank Offered Rate (LIBOR) has been used extensively as a reference rate in a range of financial products and instruments for more than 40 years. As a result of allegations regarding the manipulation of LIBOR during the previous financial crisis, financial regulators have undertaken replacing LIBOR as the referenced interest rate contained in existing credit facilities across North America, and internationally.
On Dec. 4, 2020, the Intercontinental Exchange Inc. (ICE) Benchmark Administration (IBA), the body that oversees LIBOR, published a consultation paper proposing (i) to cease publication of the one-week and two-month USD LIBOR rates following the LIBOR publication on Dec. 31, 2021, and (ii) to extend the publication of the other remaining USD LIBOR classes (i.e. overnight, one, three, six and 12-month USD LIBOR) until June 30, 2023.1 The consultation closed for comment on Jan. 25, 2021. Thereafter, IBA and the Financial Conduct Authority (FCA) announced that most classes of USD LIBOR may be extended until June 30, 2023, for legacy products only.2 Simultaneously, U.S. banking regulators clarified that USD LIBOR originations must end "as soon as practicable" but in no instance later than Dec. 30, 2021, and that new LIBOR originations prior to that date must have an alternative reference rate or a hardwired fallback.3 Though this announcement offered a slight cushion for banks and financial institutions in the midst of transitioning away from LIBOR because LIBOR originations must still cease by the close of 2021, regulators agreed that best practice would see a sustained urgency to implement an alternative reference rate and hardwired fallback language across all contracts.
The extension decision received wide praise from U.S. banking regulators, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency. So much so, that each of FCA and IBA, LIBOR's regulator and administrator, respectively, released statements regarding the precise date that LIBOR panels will end. Specifically, FCA announced that "all LIBOR settings will either cease to be provided by any administrator or no longer representative" in accordance with the following schedule:
- Immediately after Dec. 31, 2021, in the case of all sterling, euro, Swiss franc, and Japanese yen settings, and the one-week and two-month USD settings; and
- Immediately after June 30, 2023, in the case of the remaining USD settings.4
Following these announcements, the International Swaps and Derivatives Association (ISDA) announced that these statements are considered an "Index Cessation Event" under the ISDA 2020 IBOR Fallback Protocol5 6, which triggers a "Spread Adjustment Fixing Date" under the Bloomberg IBOR Fallback Rate Adjustments Rule Book.7 As such, the cessation of USD LIBOR tenors after June 2023 in accordance with the above announcements will cause existing USD credit facilities to fall back to the applicable Secured Overnight Financing Rate (SOFR) plus the spread adjustment that has been set as a result of today's announcement.8
More LIBOR remediation updates and information can be found on the LSTA website. Taft strives to provide legal updates on issues impacting our clients. Taft's LIBOR transition team provides advice and thought leadership on the many challenges associated with the LIBOR transition. Please reach out to us with any questions or if we can be of assistance regarding this transition or any of your finance law needs.
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