LIBOR Timing Update: US Banks Welcome Delay to LIBOR Switch

Introduction

On November 30, 2020, ICE Benchmark Administration (IBA) announced its intention to consult on ceasing publication of one-week and two-month USD LIBOR settings at the end of December 2021 and ceasing publication of the remaining overnight and one-, three-, six- and 12-month USD LIBOR settings at the end of June 2023.^[1] The U.K. Financial Conduct Authority (FCA) and multiple other official sector entities followed IBA’s announcement with supportive statements and additional guidance.

The announcement is notable because the FCA earlier announced that it would no longer compel banks to make LIBOR submissions after December 31, 2021, and the industry has been strongly and repeated advised to transition from LIBOR by that date. Should the responses to the consultation support the IBA’s intentions, legacy LIBOR-based contracts will continue to reference LIBOR until June 30, 2023.

On the same day as IBA’s announcement, the U.S. federal banking agencies issued a joint statement encouraging banking to cease using LIBOR for new contracts “as soon as practicable and in any event by December 31, 2021.”

Background

The announcement regarding USD LIBOR follows IBA’s earlier announcement on November 18, 2020 that it would consult on its intention to cease the publication of all LIBOR currency settings other than USD LIBOR (i.e., GBP, EUR, CHF and JPY LIBOR) immediately following the LIBOR publication on December 31, 2021.^[2] The consultation itself, which covers all LIBOR currency settings and tenors, was published on December 4, 2020, with comments requested by January 25, 2021.^[3] Feedback from panel banks to date has indicated that there does not appear to be interest in continuing to provide submissions relating to LIBOR settings beyond the end of 2021 other than the overnight and one-, three-, six- and 12-month USD LIBOR settings.

The timing of the consultation is consistent with IBA’s view that the industry would like at least one year’s notice regarding the cessation of any LIBOR settings. IBA has stressed that this consultation is not, and must not be taken to be, an announcement that IBA will cease or continue the provision of any LIBOR settings after December 31, 2021 or June 30, 2023.

IBA made note of the fact that any publication of the overnight and one-, three-, six- and 12-month USD LIBOR settings based on panel bank submissions after December 31, 2021 would still need to comply with applicable regulations, including with respect to representativeness. IBA’s cessation of any LIBOR setting would be subject to the rights of the FCA to compel IBA to continue publication.

Consultation

The consultation reviews the ICE LIBOR^® calculation methodology and regulation. It also provides background information regarding the origin of LIBOR, various U.K. Government and FCA announcements regarding the LIBOR transition and proposed fallback language in contracts. It sets out potential LIBOR cessation considerations including:

whether LIBOR panel banks are prepared to continue to provide submissions to the IBA for a limited time after 2021;

unless the FCA compels an administrator to continue benchmark publication under proposed legislation pursuant to the U.K. Financial Services Bill (the “U.K. LIBOR Legislation”), compliance with the EU Benchmark Regulation which (a) requires LIBOR to be compliant with applicable regulations including those regarding representativeness and (b) requires an administrator to ensure that benchmark input data is sufficiently accurate and reliable to represent the market reality it represents, and if the data does not meet such standard, to change the input data, contributors or methodology;

the IBA LIBOR Changes and Cessation Procedure which sets out IBA’s approach to handling cessations of some or all LIBOR settings;

the new powers proposed to be given to the FCA in the proposed U.K. LIBOR Legislation to compel publication of a synthetic LIBOR; and

considerations relating to specific LIBOR currencies and tenors.

Regulatory Response

Multiple regulators and industry bodies released statements in response to the IBA announcement regarding USD LIBOR.

The FCA statement expressed support for both the extension proposed in the consultation and the guidance provided by the U.S. prudential regulators.^[4] It noted the FCA’s intention to coordinate with relevant authorities in other jurisdictions in considering whether and, if so, how to most appropriately limit new use of USD LIBOR to protect consumers and market integrity. The FCA also expressed its intention to consult in Q2 2021 on its proposed policy approach to the use of its power under the proposed U.K. LIBOR Legislation to prohibit some or all new LIBOR use, subject to the Financial Services Bill being enacted by U.K. Parliament. It reiterated that it encourages market participants with legacy LIBOR contracts to continue work to convert these contracts or adopt robust fallbacks.

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency released a joint statement encouraging banks to transition away from USD LIBOR as soon as practicable and in any event by December 31, 2021.^[5] Given consumer protection, litigation, and reputation risks, the agencies noted that entering into new contracts referencing USD LIBOR after December 31, 2021 would create “safety and soundness” risks and that they will “examine bank practices accordingly.” They recognized, however, that if LIBOR administration extends beyond the end of 2021, there may be certain circumstances where it could be appropriate for a bank to enter into new USD LIBOR contracts after then such as: (i) transactions relating to a mandatory central counterparty auction procedure in the case of a member default; (ii) market making for client activity related to USD LIBOR transactions executed before January 1, 2022; (iii) transactions that reduce or hedge the bank’s or a client’s USD LIBOR exposure in contracts entered into before January 1, 2022; and (iv) novations of USD LIBOR transactions executed before January 1, 2022. The Federal Reserve Board also released a separate statement in support of the proposal and the related guidance provided by other regulators as steps that would facilitate a clear end date for USD LIBOR and promote the safety and soundness of the financial system.^[6]

The International Swaps and Derivatives Association (ISDA) released a statement to provide clarity that none of the statements made in connection with this consultation constitute an index cessation event under the recently published ISDA IBOR Fallbacks Supplement or the ISDA 2020 IBOR Fallbacks Protocol which provide fallback language for new and existing derivatives contracts referencing LIBOR. The statements therefore will not trigger the fallbacks under the supplement or protocol or have any effect on the calculation of the spread. ISDA also clarified that the announcement will not trigger fallbacks under the 2018 ISDA Benchmarks Supplement or its protocol.^[7]

Finally, the Alternative Reference Rates Committee (ARRC) released a “Guide on the Endgame for USD LIBOR” summarizing the announcement from the IBA and the responses of various regulators and explaining what these announcements mean and how they fit with the work of the ARRC.^[8] The Guide reiterates how the fallbacks work pursuant to the ARRC and ISDA language, noting in particular that the spread adjustment for USD LIBOR under both the ARRC and ISDA language will be fixed upon an announcement of the cessation for USD LIBOR. Such an announcement may be made following the conclusion of the consultation. The Guide further notes that while most legacy USD LIBOR contracts should be able to mature by mid-2023, the ARRC will continue to pursue its legislative proposal with New York State.^[9] The Guide also reminds market participants of the Recommended Best Practices^[10] that provide critical transition timelines. According to the ARRC, the recommended timelines are still relevant because they were developed “on the basis of what it considered to be practicable, with all recommended timelines ahead of end-2021.”