As widely expected, the United Kingdom's Financial Conduct Authority (FCA), the regulator for Libor (the London Interbank Offered Rate), has issued an announcement confirming that all 35 Libor benchmark settings currently published by the Intercontinental Exchange (ICE) Benchmark Administration (IBA), the authorized administrator for Libor, will either cease to be provided or will no longer be representative after certain specified dates. This Holland & Knight alert provides a brief summary of this recent development regarding the cessation of Libor benchmarks.
Permanent Cessation
In accordance with the FCA's announcement, the following 26 Libor settings will permanently cease as of the corresponding dates set forth below:
- All seven euro Libor settings, all seven Swiss franc Libor settings, the Spot Next, one-week, two-month and 12-month Japanese yen Libor settings, the overnight, one-week, two-month and 12-month sterling Libor settings, and the one-week and two-month U.S. dollar (USD) Libor settings will cease immediately after Dec. 31, 2021.
- Overnight and 12-month USD Libor settings will cease immediately after June 30, 2023.
The FCA has indicated that it does not intend to use any of its proposed powers to require ICE to continue publication of the 26 above-mentioned rates after the corresponding dates.
Non-Representativeness
In addition, the FCA's announcement specifies that the following additional nine Libor settings will no longer be representative of the underlying market and economic reality that each such setting is intended to measure and such representativeness will not be restored after the corresponding dates set forth below:
- One-month, three-month and six-month Japanese yen Libor settings and one-month, three-month and six-month sterling Libor settings will no longer be representative immediately after Dec. 31, 2021.
- One-month, three-month and six-month USD Libor settings will no longer be representative immediately after June 30, 2023.
The FCA intends to consult on requiring IBA to continue to publish the nine above-mentioned rates on a "synthetic" basis following the dates set forth above. Any such "synthetic" rates would, according to the FCA, provide "a fair approximation of what panel bank Libor would have been beyond the end-dates for each of the panels." The announcement reiterates that any such "synthetic" rates would not be representative of the underlying market, but would be intended to "protect customers and market integrity by reducing disruption in markets where it is unlikely to be feasible to convert certain outstanding contracts that reference Libor to alternative reference rates."
No Fallback at This Time
This announcement does not trigger any fallback conversions at this time under the International Swaps and Derivatives Association's (ISDA) recently enacted fallback provisions for derivatives, nor does it trigger any fallback conversions at this time under the recommended fallback provisions for USD Libor cash products published by the New York Federal Reserve Bank's Alternative Reference Rates Committee (ARRC). However, this announcement does fix, as of March 5, 2021, the spread adjustments that will be applied to the adjusted recommended replacement rate – the Secured Overnight Financing Rate (SOFR), in the case of USD Libor – when the fallback conversion does occur under ISDA's and the ARRC's provisions (other than those relating to consumer cash products). For example, the spread adjustment for one-month USD Libor, one of the most commonly used USD Libor rates, has been fixed at +0.11448 percent. The fixed spread adjustments for all Libor rates are available from Bloomberg Index Services Limited's website.
Notice Requirement
This announcement may trigger notice requirements under certain variants of the ARRC's recommended fallback provisions. In particular, lenders and administrative agents are advised to review the terms of their existing agreements to determine whether any notice requirement is triggered by the FCA's announcement.
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