Global: Longer Runway for USD LIBOR Legacy Transactions

In brief

In a set of coordinated statements, LIBOR’s administrator, LIBOR’s principal regulator and the principal US banking regulators announced plans that would extend the period during which panel USD LIBOR quotations would be made available until the end of June 2023.  This would effectively provide a period for legacy USD LIBOR transactions to use LIBOR quotations for certain tenors after 2 January 2022 (when LIBOR is expected to cease for other currencies).


Contents

 

  1. These announcements should be viewed as a stay of execution and not a commutation of sentence.  Clients should continue efforts to transition from LIBOR (including USD LIBOR) to alternative reference rates.
  2. These announcements likely represent a pragmatic approach to USD LIBOR transition, given the current state of such transition, rather than a significant change in position by regulators.
  3. The announcements by the US regulators include supervisory guidance encouraging banks to stop new USD LIBOR originations as soon as practicable and no later than the end of 2021.
  4. These announcements may be helpful for “tough legacy” USD LIBOR transactions, more of which may mature by their terms in the extended period than by the end of 2021.

In more detail 

On 30 November 2020, LIBOR’s administrator, ICE Benchmark Administration Limited ("IBA"), LIBOR’s principal regulator, the UK Financial Conduct Authority ("FCA"), and the three principal US banking regulators, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a set of coordinated statements concerning US Dollar LIBOR.

IBA announced that it will consult in early December on its intention to cease the publication of the one week and two month USD LIBOR settings immediately following the LIBOR publication on 31 December 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on 30 June 2023.

In response to the IBA’s announcement, the FCA issued a statement supporting the IBA’s announcement, and stating that the FCA had had discussions with the USD LIBOR panel banks for such banks to continue submitting USD LIBOR quotations through the end of June 2023.

The US banking regulators issued a statement in which they expressed the view that “[e]xtending the publication of certain USD LIBOR tenors until June 30, 2023 would allow most legacy USD LIBOR contracts to mature before LIBOR experiences disruptions.”  The US banking regulators stated that they believed entering into new contracts that use USD LIBOR as a reference rate after 31 December 2021 would create safety and soundness risks and that they would examine bank practices accordingly.  The US banking regulators also (i) encouraged banks to cease entering into new contracts that use USD LIBOR as a reference rate “as soon as practicable and in any event by December 31, 2021” and (ii) stated that new contracts entered into before 31 December 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s cessation.

The announcements by the IBA, FCA and the US banking regulators were followed by an announcement by the US Alternative Reference Rates Committee ("ARRC"), which “applauded” such announcements, and stated that such announcements “would support a smooth transition for legacy contracts by allowing time for most to mature before USD LIBOR is proposed to cease, subject to consultation outcomes.”

The announcements from both the FCA and the US banking regulators contained express language stating that such announcements should not be read as announcing that the LIBOR benchmark has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative for the purposes of fallback language adopted by the International Swaps and Derivatives Association ("ISDA").  ISDA separately announced that such announcements did not constitute an index cessation event.

Taken together, these announcements indicate that, subject to the results of the IBA consultation, USD LIBOR quotations (for interest periods other than one week and two months) should be publicly available after 2 January 2022, when they had been expected to cease.  LIBOR is expected to cease for other currencies on that date.

The statement of the US banking regulators to cease new USD LIBOR originations no later than 31 December 2021 may be viewed by some as an extension of the recommended target deadline of 30 June 2021 for the cessation of such originations that is set forth in the ARRC’s Best Practices for LIBOR Transition (as most recently updated in September 2020).  We note that the US banking regulators recommended ceasing new USD LIBOR originations “as soon as practicable.”

Although these extensions are welcome news, most firms will want to continue to press on with active LIBOR transition, rather than rely on the continued availability of USD LIBOR quotations after 2021, since actively managing the process will give them more control over their fate.  USD LIBOR transactions that do not transition to SOFR (the identified risk-free rate for USD) or another alternative reference rate may be subject to a LIBOR that does not much resemble (or behave like) the current LIBOR.

While many “tough legacy” USD LIBOR transactions may mature before the extended deadline, it is possible that not all of them will.  It is unclear whether other proposed “tough legacy” solutions (including legislative relief) will be needed after these announcements, but it is conceivable that some will be.

Please refer to Baker McKenzie’s LIBOR Transition hub page for additional information on LIBOR transition.


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