Newsflashes

LIBOR Transition – FCA Announcement of 5 March 2021

05.03.2021

The Financial Conduct Authority (FCA) announced today the dates of the future cessation or loss of representativeness of the 35 LIBOR settings currently published by the ICE Benchmark Administration (IBA).

This announcement takes into account the results of the consultation by the IBA that closed on 25 January 2021.

1. Key announcements

The FCA announces that the following 26 LIBOR settings will permanently cease as follows:

  • Immediately after 31 December 2021
    • CHF: all 7 settings
    • EUR: all 7 settings
    • GBP: overnight, 1-week, 2-month, 12-month
    • JPY: spot next, 1-week, 2-month, 12-month
    • USD: 1-week, 2-month
  • Immediately after 30 June 2023
    • USD: overnight, 12-month

The FCA announces that the following LIBOR settings are no longer representative as follows:

  • Immediately after 31 December 2021
    • GBP: 1-month, 3-month, 6-month
    • JPY: 1-month, 3-month, 6-month
  • Immediately after 30 June 2023
    • USD: 1-month, 3-month, 6-month

The FCA also announced that it will consult on the need for a continued publication of a "synthetic LIBOR" as regards such 1-month, 3-month and 6-month GBP, JPY and USD LIBOR settings that will lose their representativeness on 31 December 2021 or 30 June 2023, respectively. The FCA states its intentions as regards the methodology it would propose to use to determine such "synthetic LIBOR". This would be a forward-looking term rate version of the relevant risk-free rate plus a fixed spread calculated in the same way as the spread adjustment taken into account under the 2020 IBOR Fallbacks Protocol published by the International Swaps and Derivatives Association, Inc. (ISDA).

2. Impact for Derivatives Transaction

As regards OTC derivatives transactions including the fallbacks specified in the 2020 IBOR Fallbacks Protocol published by ISDA, today's announcement defines an Index Cessation Effective Date, i.e. the date when the fallbacks will become effective. This date will be

  • 1 January 2022 for CHF, EUR, GBP and JPY LIBOR (for all tenors); and
  • 1 July 2023 for USD LIBOR (for all tenors).

At the same time, today's announcement fixes the Spread Adjustments as of 5 March 2021, as published by Bloomberg. Please also see today's ISDA guidance in this respect.

This will be relevant not only for parties who adhered to the 2020 IBOR Fallbacks Protocol published by ISDA, but also to parties who include the terms of such Protocol into their OTC derivatives documentation by way of a bilateral agreement, e.g. in respect of Swiss Master Agreements for OTC derivatives published by the Swiss Bankers Association, by entering into the Benchmark Amendment Agreement published by the Swiss Bankers Association or by incorporating the "Supplemental Definitions" to Swiss Master Agreements for OTC Derivatives Transactions, which incorporate such fallback provisions into new transactions independently of a Benchmark Amendment Agreement.

To the extent that parties do not validly agree to such fallbacks, it may become possible to rely for a limited time period on a "synthetic LIBOR" for the 1-month, 3-month and 6-month GBP, USD and JPY tenors. However, this is not certain at this stage.

Also, please note that parties should consider the impact of any amendments to the wording of the 2020 IBOR Fallbacks Protocol published by ISDA, in the event that they incorporate it by way of bilateral agreement (e.g. any disapplication of the "loss of representativeness" trigger).

3. Impact for Loans

For loan agreements, parties should carefully consider the impact of today's announcement on any fallback clause they may have already incorporated into their agreements. In the absence of a uniform adoption of fallback clauses, the analysis should be made in a case-by-case basis.

While it is not common, particularly, in the syndicated lending market, to define LIBOR replacement events by reference only to a permanent cessation of LIBOR, parties should be aware of the following: With a view to any such "permanent cessation trigger" events used in loan agreements, today's announcement may set a cessation effective date only for those LIBOR settings that will be subject to a permanent cessation.

 

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