ARTICLE
12 April 2018

FCA Says LIBOR Transition Won't Subject Legacy Swaps To Margin Rules

CW
Cadwalader, Wickersham & Taft LLP

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Cadwalader, established in 1792, serves a diverse client base, including many of the world's leading financial institutions, funds and corporations. With offices in the United States and Europe, Cadwalader offers legal representation in antitrust, banking, corporate finance, corporate governance, executive compensation, financial restructuring, intellectual property, litigation, mergers and acquisitions, private equity, private wealth, real estate, regulation, securitization, structured finance, tax and white collar defense.
According to reports, the UK Financial Conduct Authority ("FCA") does not believe that moving a legacy swap contract from LIBOR to an alternative reference rate would represent a material amendment...
United Kingdom Finance and Banking

According to reports, the UK Financial Conduct Authority ("FCA") does not believe that moving a legacy swap contract from LIBOR to an alternative reference rate would represent a material amendment to the contract, and thus would not "trigger application of margin requirements."

A material amendment to a contract could cause it to be classified as a new trade, which would require a firm to adhere to both initial and variation margin requirements. The FCA's reported assessment - that altering the reference rate will not represent a material amendment - resolves uncertainty around whether legacy swap contracts will be subjected to the new European Market Infrastructure Regulation margin requirements.

As highlighted by Risk.net, the FCA intends to "discuss with other relevant authorities how clarification on this point can be provided."

Commentary / Lary Stromfeld

An official FCA statement that a change in index rate does not represent a material amendment to swap terms, requiring the collection of margin, would be a helpful step toward removing unnecessary confusion and economic consequences of the transition away from LIBOR.

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