FCA announcement kicks off LIBOR finals
On March 5, 2021, the UK Financial Conduct Authority (FCA) and the administrator of LIBOR, ICE Benchmark Administration (ZICO) each has made important announcements to the parties to instruments or other contracts that refer to LIBOR.
The FCA has published a ad with regard to the future termination and loss of representativeness of each of the 35 LIBOR benchmarks currently published by the IBA. In its announcement, the FCA confirmed the dates after which the banks on the panel will no longer be required to submit to LIBOR. The FCA urged market participants to continue with their LIBOR termination plans and ensure that the LIBOR transition is completed within the time frames specified for each currency holder.
Reflection of comments on IBA consultation Upon termination, the FCA has confirmed that the 35 LIBOR Tenors will cease to be supplied or will no longer be representative as of the dates shown in the table below.
Just after December 31, 2021
EUR LIBOR – all the tenors
One of the requests the IBA received in response to its consultation was for confirmation that LIBOR rates would remain representative until proposed termination dates. While not a guarantee, the FCA reassured companies in its announcement that it does not expect LIBOR rates to become unrepresentative until specified dates.
Difficult legacy contracts
It has been recognized by the FCA that there will be a population of old LIBOR contracts for which the transition to an alternative rate might not be possible. The FCA has confirmed that it will consult1 on the use of its enhanced powers under the EU Benchmarks Regulation, as incorporated into UK law (UK BMR), to require the IBA to continue to publish certain levels of LIBOR for an additional period after cessation using a methodology approved by the FCA (Synthetic LIBOR). See our briefings: LIBOR: Are the new powers proposed by the FCA the answer to the problem? and UK derivatives regulation will become less derivative for more information on UK BMR and difficult legacy contracts. Accordingly, although the FCA announcement makes it clear that 26 of the tenors listed above will cease publication on the dates indicated, the publication of Synthetic LIBOR will be considered for the following nine LIBOR tenors:
GBP LIBOR 1 month
JPY LIBOR 1 month
USD LIBOR 1 month
In its announcement, the FCA made it clear that these nine LIBOR grades would no longer be representative after June 30, 2023, whether or not there is a decision to allow further publication of a synthetic version of a or more of such LIBOR contents after that date. Dated. The FCA reminded market participants that, if allowed, the publication of Synthetic LIBOR would be intended to help parties unable to transition from difficult old contracts by June 30, 2023. Synthetic LIBOR will not be available. for new contracts because, as noted above, is the LIBOR rate that a continuous synthetic version would not be representative for UK BMR purposes.
In its announcement, the FCA reminded market participants that the publication of Synthetic LIBOR is intended to help parties with difficult legacy contracts. Synthetic LIBOR will not be available for new business as the rate is not representative for UK BMR purposes.
The FCA has also published a series of policy statements with respect to some of his increased powers under UK BMR. FCA policy statements provide more details on the policy framework with respect to the new methodology for synthetic LIBOR and a forward rate of the relevant risk-free rate plus a fixed spread aligned with the spreads in the solutions. ISDA relief.
We are rapidly moving closer to the Pound Sterling Risk-Free Benchmark Working Group (Sterling working group) end of the first quarter of 2021, the cut-off date from which the launch of (a) new loans linked to LIBOR in sterling and refinanced and (b) new linear derivatives linked to LIBOR in sterling (in both cases which expire after the end of 2021) must cease.
The recommendation of the British Pound Task Force is that the parties should have actively converted the old LIBOR contracts into British pounds (if conversion is possible – see above on difficult legacy contracts) by the end of the third quarter. 2021.
Although the LIBOR release will continue until the dates stated above, this does not mean that the parties can wait until the last quarter of 2021 to take action on new and old contracts.
IBOR ISDA 2020 rescue protocol
The publication of the FCA announcement is an “index termination event” for the purposes of the ISDA IBOR 2020 IBOR fallback protocol (ISDA protocol) and Supplement 70 to the 2006 ISDA Definitions (the Extra charge). Please see our ISDA protocol guide and supplement for more information.
the technical manual published by Bloomberg Investment Services Limited on March 5, 2021 sets the “Spread Adjustment Fixing Date” under the Protocol and ISDA Supplement for all LIBOR holdings in all currencies. FCA’s announcement provides market participants with welcome certainty regarding the fixed spread adjustments that will apply to pullback rates.
The FCA announcement does not trigger any specific notification requirements between ISDA counterparties, unless otherwise agreed in their documentation. Specific notice provisions may be included in the cash market’s fallback language and the parties will need to determine whether those provisions require them to provide notice regarding the FCA announcement. In particular, depending on the language of the contract, administrative agents and direct lenders under existing loan agreements may be required to notify borrowers and / or other members of the banking group of this event. In addition, today’s announcement may result in some loan agreements triggering language that requires or allows the parties to modify the loan agreement to set an interest rate of fallback.
For the purposes of the Protocol and the ISDA Supplement, the termination of 1 week and 2 month USD LIBOR maturities after December 31, 2021 will not trigger an Index Cessation Effective Date on that date. Instead, the Calculation Agent will interpolate the relevant rate using the shortest and longest maturities until this method is no longer available (i.e. after the remaining maturities used for the interpolation will have ceased to exist or will become unrepresentative after June 30, 2023).
The FCA announcement set the adjustment gap that will be added to the ISDA pullback rate for derivatives (i.e. composite SOFR) in order to minimize, to the extent possible, any transfer of value when transitioning under protocol and ISDA supplement. In addition, the ARRC announced on June 30, 2020 that it would align with ISDA spread adjustments for non-consumer USD LIBOR contracts that incorporated the Committee’s alternative benchmarks (ARRC) models the wired fallback language.
The ARRC confirmed in a declaration published on March 9, 2021 that, according to its recommended fallback language, which has similar, but not identical, triggers to the ISDA fallback provisions, the FCA announcement constitutes a “benchmark transition event.” The ARRC has already published a declaration welcoming the FCA announcement. the Faq published by the ARRC provide additional information on the effect of the occurrence of a baseline transition event.
LMA Screen pricing clause replacement
The publication of the FCA announcement may be a “Screen Rate Replacement Event” for the purposes of the UK Loan Market Association (LMA) model installation agreements. The implications will vary depending on the wording used:
- this could mean that changes to replace LIBOR in a facility agreement can be made with the consent of the majority of the lender rather than the full consent of the lender;
- it can trigger good faith negotiations (either now or at a later date in 2021) to replace LIBOR;
- There is a range of bespoke drafting in the loan market, especially for bilateral loans, where there may be notification requirements or a modification process triggered by the announcement.
It should be noted that the FCA announcement may not be an immediate screen rate replacement event. The LMA released a suggested pre-cessation trigger in October 2020, with the intention of repeating an FCA announcement, but that trigger will not be found in many installation agreements signed before that date (and it doesn’t. there was no requirement for it to be added to installation agreements after that date). However, there may be other screen rate replacement events that could apply as a result of the FCA announcement, for example, the parties may agree that LIBOR is no longer appropriate for the purposes. the calculation of interest.
Loan market participants with LIBOR-linked facility agreements should review their loan agreements in light of the FCA announcement to see what, if anything, is triggered by the announcement. Even though the FCA announcement does not directly trigger an amendment or negotiation, it is a clear reminder that the parties must have an active transition plan away from LIBOR.