INSIGHT

The end is more nigh: FCA announces official LIBOR cessation dates

By Yu Zhang, Tom Highnam, Diccon Loxton
Banking Financial Services Risk & Compliance

Affects any contracts referencing LIBOR 4 min read

On 5 March the UK LIBOR regulator, the FCA, announced cessation dates for the vast majority of LIBOR settings. As expected, the key date will be end of this year (ie 31 December 2021) for most settings.

For the remaining settings, it announced the dates beyond which LIBOR will not be representative of the underlying market and economic reality. These settings may continue for a period synthetically.

This is important as this announcement will be a trigger for LIBOR fallbacks to take effect on the relevant date in many derivatives and may also trigger fallback provisions in loans and other financial products.

Anyone with exposure to LIBOR will need to ensure they have plans to transition away from LIBOR in advance of those dates.

Key takeaways

  • If you have any contracts referencing LIBOR, this will affect you.
  • If your contract contains fallbacks for LIBOR, those fallbacks may be triggered by an official announcement that LIBOR will permanently cease to be published or no longer be representative of the underlying market on a particular date. For example, this constitutes an Index Cessation Event under the ISDA Fallbacks Supplement and Protocol. If so, LIBOR will no longer apply in your contract on the relevant date.
  • If your contract does not contain fallbacks for LIBOR and it is expected to survive beyond the relevant cessation date, you need to amend your contract ahead of that date.
  • LIBOR transition is a complex project which may well affect many aspects of a business. Make sure you have a bespoke strategy to facilitate a targeted and efficient LIBOR transition.

Who in your organisation needs to know about this?

Users of loans, derivatives and other products referencing LIBOR, corporate treasurers, benchmark transition project team, legal counsel, risk and compliance.

What did the FCA announcement say?

The FCA provided deadlines in relation to all 35 current LIBOR settings.

Permanent cessation dates set for 26 LIBOR settings

The following LIBOR settings will permanently cease to be published:

  • after 31 December 2021 in the case of:
    • GBP LIBOR: the overnight, 1-week, 2-month and 12-month settings;
    • USD LIBOR: the 1-week and 2-month settings;
    • EUR LIBOR: all seven settings;
    • CHF LIBOR: all seven settings; and
    • JPY LIBOR: the spot next, 1-week, 2-month and 12-month settings; and
  • after 30 June 2023 in the case of:
    • USD LIBOR: the overnight and 12-month settings.
The other nine LIBOR settings limp on (but will be unrepresentative)

For the remaining nine settings the FCA will consult on and/or consider requiring the IBA, the administrator of LIBOR, to continue to publish these settings after end of 2021 on a ‘synthetic’ basis (ie using a changed methodology). (The FCA set out its proposed methodology for synthetic LIBOR in the statements of policy that accompanied its statement). This would help parties struggling to transition legacy contracts. These settings are widely used.

The FCA stated that these nine LIBOR settings will no longer be representative of the underlying market and economic reality that it is intended to measure and that such representativeness will not be restored:

  • after 31 December 2021 in the case of:
    • GBP LIBOR: 1-month, 3-month and 6-month settings; and
    • JPY LIBOR: 1-month, 3-month and 6-month settings; and
  • after 30 June 2023 in the case of:
    • USD LIBOR: 1-month, 3-month and 6-month settings.

So why does this matter?

Loans

You will need to check the terms of your loan. The precise effect of the FCA announcement will differ depending on the drafting.

In the Australian market, a number of loans incorporate the optional language of the APLMA Replacement of Screen Rate clause. If your loan contains this language, then the announcement might trigger the LIBOR replacement amendment process to become a majority lender decision rather than an all lender decision.

If your loan agreement is based on the APLMA Syndicated Facility Agreement Rate Switch Exposure Draft published a couple of months ago, then the FCA announcement might constitute a 'Rate Switch Trigger Event' and cause fallbacks to apply on the relevant date unless an earlier backstop rate switch date has been set. The same is true if your loan agreement is based on the LMA Rate Switch Exposure Draft on which the APLMA exposure draft was based.

In any case, if you have any loan referencing LIBOR you will need to prepare now to ensure transition before the deadlines announced by the FCA.

Derivatives

For derivatives subject to the ISDA IBOR Fallbacks Supplement or Protocol which took effect on 25 January, the statements by the FCA constitute an 'Index Cessation Event' for all 35 LIBOR settings. ISDA confirmed this in a separate announcement.

This means that:

  • Importantly, fallbacks to the adjusted risk-free rate plus spread will automatically apply for outstanding derivatives contracts that incorporate the ISDA IBOR Fallbacks Supplement or are subject to adherence of the ISDA 2020 IBOR Fallbacks Protocol on the following dates:
    • from 1 January 2022: for trades referencing all GBP, EUR, JPY and CHF LIBOR settings; and
    • from 1 July 2023: for trades referencing all USD LIBOR settings. The rate for one-week and two-month USD LIBOR settings will be computed by the calculation agent using linear interpolation between end of 2021 and 30 June 2023, before falling back to the adjusted risk-free rate plus spread after 30 June 2023; and
  • the fallback spread adjustment published by Bloomberg is fixed as of the date of the announcement ie. 5 March 2021 for all LIBOR settings.

If you have LIBOR referencing derivatives that are not subject to the ISDA IBOR Fallbacks Supplement or Protocol, you will need to ensure there are adequate fallbacks before the deadlines announced by the FCA.

For specific questions or further information

  • Please get in touch with the Allens expert team to learn more about how we can assist with your benchmark transition project or any other questions in relation to derivatives more generally.
  • For more information, watch our video from the FX Markets Australia Virtual Conference panel on Overview on Benchmark Reforms, in which Yu Zhang is a panellist.
  • For more information about the ISDA IBOR Fallbacks Protocol and Supplement, please see our Insight on it.