Following a series of announcements in recent days by benchmark providers, regulators and industry groups, key dates for the LIBOR transition have now been set. As a result, for market participants that have adopted or will adopt industry-standard LIBOR fallback provisions, the timing for the transition to fallback rates is now clear, and the key spread adjustments that will apply upon the transition have now been fixed.
On March 5, 2021, following the completion of its earlier consultation,1 the ICE Benchmark Administration (IBA) announced that it will cease the publication of:
- all GBP, EUR, CHF and JPY LIBOR settings, and the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021; and
- the Overnight and one-month, three-month, six-month and 12-month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.2
In connection with this announcement, the U.K. Financial Conduct Authority (FCA), which regulates LIBOR, also made an announcement confirming that all 35 LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after the dates set out above.3 As discussed herein, the FCA statement triggers the fixing of spread adjustments under industry-standard fallback provisions.
The IBA and FCA announcements followed IBA's earlier consultation regarding ceasing publication of all LIBOR settings that commenced in December 2020.4 For more background regarding the initial IBA consultation, please see our earlier update, "LIBOR Timing Update: US Banks Welcome Delay to LIBOR Switch."5
Following its consultations with multiple stakeholders, IBA formally notified the FCA that it intends to cease providing all LIBOR settings for all currencies on the dates specified above.
In connection with this notification, the FCA announced that it will not require any panel banks to continue to submit to LIBOR beyond those dates, or to require IBA to continue to publish LIBOR on the basis of panel bank submissions beyond those dates.
The FCA confirmed to IBA that it does not expect that any LIBOR settings will become unrepresentative before the announced intended cessation dates.6
Following the FCA announcement, the International Swaps and Derivatives Association (ISDA) released its Future Cessation and Non-Representativeness Guidance (the "Guidance").7 In the Guidance, ISDA noted that the FCA's announcement triggered the fallback language set out in the ISDA 2020 IBOR Fallbacks Protocol, Supplement 70 to the 2006 ISDA Definitions, and the 2018 ISDA Benchmarks Supplement.
The Guidance noted that for the purposes of the IBOR Fallbacks Protocol and IBOR Fallbacks Supplement, an "Index Cessation Event" with respect to all 35 LIBOR settings currently published by the IBA has, or will be deemed to have, occurred on March 5, 2021, as a result of the FCA announcement that all LIBOR settings will either permanently cease being published or will no longer be representative. The related "Index Cessation Effective Date" will occur on the first London Banking Day on or after January 1, 2022, for the 24 LIBOR settings ending immediately after December 31, 2021, and the first London Banking Day on or after July 1, 2023, for all seven USD LIBOR settings ending immediately after June 30, 2023.
ISDA also clarified that after December 31, 2021, the rates for the one-week and two-month LIBOR tenors, which will have ceased as of that date, will be determined by interpolating between the next longer and next shorter tenors, until the latter Index Cessation Effective Date described above, at which point no such longer or shorter LIBOR tenors are expected to be available.
Following the Index Cessation Effective Date, the fallbacks (to the adjusted risk-free rate plus spread) published by Bloomberg in respect of each LIBOR tenor will automatically apply to derivatives contracts that incorporate Supplement 70 to the 2006 ISDA Definitions or are subject to adherence of the ISDA 2020 IBOR Fallbacks Protocol. Contracts incorporating the 2006 ISDA Definitions that were entered into on or after January 25, 2021, automatically incorporate Supplement 70 to the 2006 ISDA Definitions.
ISDA also noted the possibility of events arising in the future which, though not currently contemplated, could affect the application of the fallback rates, such as a subsequent Index Cessation Event applying to all LIBOR settings, which could change the Index Cessation Effective Date to an earlier date.
The Guidance also noted that the FCA announcement served as a spread-fixing event, meaning that the spread adjustment for each LIBOR setting would be fixed as of March 5, 2021. The same day as the FCA announcement, Bloomberg confirmed that under its IBOR Fallback Rate Adjustments Rule Book, the announcement constituted a "Spread Adjustment Fixing Date" and published the final, fixed spread adjustments for each LIBOR setting.8
[Lastly, the Guidance notes that pursuant to the ISDA Benchmarks Supplement, if the definition of a benchmark in a contract incorporating this supplement includes a reference to an "index cessation event" (which would include contracts that are subject to the ISDA 2020 IBOR Fallbacks Protocol or Supplement 70 to the 2006 ISDA Definitions which reference one of the LIBOR tenors specified above), upon the occurrence of that event, the fallback specified in that definition will apply. The Guidance further notes that if a contract referencing a LIBOR tenor does not incorporate a concept of an index cessation event in the definition of that rate, but does incorporate the ISDA Benchmarks Supplement then upon the cessation dates of the LIBOR tenors described in the IBA announcement, each party must seek to apply at least one "Alternative Continuation Fallback" prior to the "Cut-Off Date." The following options are considered to be "Alternative Continuation Fallbacks": (a) an agreement between the parties as to the actions (if any) to be taken to account for the cessation event; (b) the application of an "Alternative Pre-nominated Index" if the parties have specified an "Impacted Index;" (c) the application of an "Alternative Post-nominated Index" or (d) the application of a "Calculation Agent Nominated Replacement Index." The "Cut-Off Date" is the later of 15 business days following the announcement by LIBOR and the first day on which the LIBOR setting is no longer available provided certain conditions are met.]
Other US Industry and Regulatory Responses
Other key U.S. industry bodies and regulators commended both the FCA and IBA following the FCA announcement. The Alternative Reference Rates Committee (ARRC) Chairman Tom Wipf said that the FCA announcements marked a clear end date for USD LIBOR and provided more certainty for market participants. "We now know when a representative USD LIBOR will end and what its associated spread adjustments will be in no uncertain terms," Wipf said. Wipf's statements were echoed by the Vice-Chair for Supervision at the Federal Reserve Board, the President of the Federal Reserve Bank of New York and the Acting CFTC Chairman.9
The ARRC also confirmed that it viewed the March 5, 2021 announcements by IBA and the FCA on future cessation and loss of representativeness of the LIBOR benchmarks to be a "Benchmark Transition Event" in relation to all USD LIBOR settings under the ARRC recommended fallback language for new issuances of LIBOR floating rate notes, securitizations, syndicated business loans and bilateral business loans.10
A "Benchmark Transition Event" triggers the transition to the fallback rates, which become effective upon the "Benchmark Replacement Dates," which, consistent with the announcements, are expected to be on or immediately after: (i) December 31, 2021 for one-week and two-month USD LIBOR and (ii) June 30, 2023 for Overnight, one-month, three-month, six-month, and 12-month USD LIBOR. The ARRC-recommended fallback language for floating rate notes and securitizations requires linear interpolation for one-week and two-month USD LIBOR based on USD LIBOR tenors that continue to be published until the cessation of their publication. When the fallback rates apply, the spread-adjustment applied to the adjusted risk-free rate will be the same (now fixed) spread adjustment determined by ISDA (other than for loans to consumer borrowers which will be subject to a one year transition period during which the ARRC will consider the most appropriate approach for such products).11
In its announcement, the FCA stated that it will consult on the possibility of using its proposed powers under the Financial Services Bill requiring IBA to continue publishing certain LIBOR tenors on a "synthetic" basis. If enacted, the bill would grant the FCA the power to require the administrator of a critical benchmark, such as LIBOR, to alter the benchmark calculation methodology if it determines that the current methodology (e.g., polling of panel banks) is no longer representative of the market rate and it would be feasible and necessary to protect consumers or the integrity of the market. This would result in a different interest rate being published as the "screen rate" in place of LIBOR. The FCA would endeavor to base this upon market input as to how to calculate this alternative, which for most currencies, is likely to be an adjusted risk-free rate chosen by each LIBOR currency area with a fixed credit spread adjustment. The intended purpose of the synthetic rate is to reduce disruption for those holding "tough legacy" contracts which cannot easily be amended to incorporate fallback language.12
The FCA announced more specifically that it will consult on requiring the use of one-month, three-month and six-month sterling LIBOR on a "synthetic" basis for a further period after December 31, 2021, and one-month, three-month and six-month Japanese yen LIBOR on a synthetic basis for an additional year to December 31, 2022. The FCA also noted that it will continue to consider whether to require the publication of one-month, three-month and six-month USD LIBOR after June 30, 2023.
1. IBA, ICE LIBOR® Consultation on Potential Cessation (December 2020).
2. Intercontinental Exchange, Inc., ICE Benchmark Administration Publishes Feedback Statement for the Consultation on Its Intention to Cease the Publication of LIBOR Settings (Mar. 5, 2021).
3. FCA, FCA announcement on future cessation and loss of representativeness of the LIBOR benchmarks (Mar. 5, 2021).
4. Intercontinental Exchange, Inc., ICE Benchmark Administration to Consult on Its Intention to Cease the Publication of One Week and Two Month USD LIBOR Settings at End-December 2021, and the Remaining USD LIBOR Settings at End-June 2023 (Nov. 30, 2020).
5. Shearman & Sterling LLP, LIBOR Timing Update: US Banks Welcome Delay to LIBOR Switch (Jan. 7, 2021).
6. Intercontinental Exchange, Inc., ICE Benchmark Administration Publishes Feedback Statement for the Consultation on Its Intention to Cease the Publication of LIBOR Settings (Mar. 5, 2021).
7. International Swaps and Derivatives Association, Inc., FCA Announcement on Future Cessation and Loss of Representativeness of the LIBOR Benchmarks (Mar. 5, 2021, updated Mar. 8, 2021).
8. Bloomberg Index Services Limited, IBOR Fallbacks - Technical Notice - Spread Fixing Event for LIBOR (Mar. 5, 2021).
9. ARRC, ARRC Commends Decisions Outlining the Definitive Endgame for LIBOR (Mar. 5, 2021).
10. ARRC, ARRC Confirms a "Benchmark Transition Event" has occurred under ARRC Fallback Language (Mar. 8, 2021).
11. ARRC, ARRC FAQs Regarding the Occurrence of a Benchmark Transition Event (Mar. 8, 2021).
12. FCA, Proposed Amendments to the Benchmarks Regulation (June 23, 2020).
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