On Friday, 30 June 2023, the last-ever rates based on the London Interbank Offered Rates (LIBORs) will be published. This momentous day will be the culmination of a long journey for the financial markets, as market participants move into the future with alternative risk-free rates. However, work remains, in some jurisdictions more than others, to address legacy transactions and to understand what rate a USD LIBOR contract may switch to following this date.

Further efforts will also be needed to transition away from interbank-offered rates (IBORs) in some non-LIBOR currencies and to comply with the latest regulatory guidance on the use of robust contractual fallbacks to avoid the need for a rerun of the LIBOR transition process.

In this edition, we examine the current state of play and what actions financial institutions, asset managers, insurers and corporates should take.

Key takeaways

• As of 1 July 2023, LIBORs, as a measure of the interest rates on which key banks are willing to lend money in the short-term interbank market, will no longer be published.
• Synthetic versions of one-, three- and six-month USD LIBORs will be available until 30 September 2024. These will be published by ICE Benchmark Administration Limited in the same place and at the same times as the original USD LIBORs but will be constituted from different data, i.e., CME Group's Term SOFR rates together with fixed credit spread adjustments.
• A number of mechanisms can provide a temporary reprieve or technical solution for unremediated contracts; namely synthetic USD LIBOR, the US Adjustable Interest Rate (LIBOR) Act ("US LIBOR Act") and the ISDA IBOR Fallbacks Protocol. Nonetheless, all market participants with unremediated legacy contracts should do the following:
  • Assess what interest rates will apply to those contracts after 30 June 2023 (e.g., a contractual fallback rate, a statutorily imposed replacement rate or synthetic LIBOR).
  • Actively continue to progress amendments to the interest rate terms of legacy contracts wherever possible.
• For USD loans, Term SOFR (as opposed to Compounded in Arrears SOFR or Daily Simple SOFR) is proving the most popular replacement rate. Some regulators, and the Financial Stability Board, are apprehensive about the widespread use of Term SOFR and would prefer more transactions to be overnight SOFR-based wherever achievable. We expect them to continue to monitor the adoption of Term SOFR and, if necessary, issue further guidance on its use.
• There are no current plans for EURIBOR to cease, but European regulators have recently reiterated their guidance for parties to ensure that their EURIBOR-based contracts include robust fallbacks should EURIBOR become unavailable. Parties should consider including a rate switch mechanism in new euro loan contracts to effect an automatic conversion from EURIBOR to EUR STR (the risk-free euro rate) upon the cessation of EURIBOR or EURIBOR ceasing to be representative of lending costs.
• With forward-looking term rates based on €STR now available for use in transactions, these rates, which are operationally (if not economically) similar to EURIBOR, may encourage transition in euro-denominated products.
• Work on LIBOR transition will continue for some time as other currencies progress toward the use of risk-free rates.

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*This article was written with the assistance of James McEarlean, Trainee Solicitor at Baker McKenzie of the London office.