FCA Announcement May Trigger LIBOR Cessation Benchmark

By: The Practical Guidance Finance Team

The UK Financial Conduct Authority (FCA) has formally set the dates by which panel banks will no longer report on tenors of the London Interbank Offered Rate (LIBOR). These are the final dates the FCA will regulate LIBOR and the ICE Benchmark Administration (IBA) will publish LIBOR. If these dates remain unchanged, then all 35 tenors of LIBOR will cease after June 30, 2023. This could trigger a notice requirement under some credit agreements, as described below.¹

LIBOR (OFTEN REFERRED TO AS THE EURODOLLAR RATE IN credit agreements) has been the baseline pricing mechanism in loan agreements (and many other contractual arrangements, for that matter). The responsibility for overseeing and administering has rested with the IBA following the LIBOR manipulation scandal of 2012. The FCA, the regulator overseeing LIBOR, said that it would no longer require banks to provide LIBOR estimates at the end of 2021. However, the IBA subsequently said that only one-week and two-month USD LIBOR and, likely, Euro LIBOR and Swiss Franc LIBOR would cease on December 31, 2021, with the remaining tenors expiring on June 30, 2023. The Federal Reserve and the Alternative Reference Rate Committee (ARRC), a board comprising financial institutions and banks, trade associations (such as the Loan Syndication and Trading Association (LSTA)), and official sector members advising on the cessation of LIBOR in the United States, supported this announcement, as it provides some breathing room in the transition, but maintains clear targets.

Timing for LIBOR’s End

With its announcement, the FCA also supports the IBA’s timetable. Specifically, the FCA said that:

• Publication of all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month and 12-month sterling LIBOR settings; and the 1-week and 2-month USD LIBOR settings will cease immediately after December 31, 2021.
• Publication of the overnight and 12-month USD LIBOR settings will cease immediately after June 30, 2023. Previously, it had been noted that these will remain in effect to reduce disruption to a post-LIBOR benchmark rate (such as the Secured Overnight Financing Rate (SOFR))—specifically “in markets where it is unlikely to be feasible to convert certain outstanding contracts that reference LIBOR to alternative reference rates.” This includes commercial loan documents. Note that the extension relates only to legacy contracts, and new originations should not use LIBOR after 2021.

As with overnight and 12-month USD LIBOR, the FCA also said that it will consult on requiring the IBA to continue to publish the 1-month, 3-month, and 6-month Japanese yen LIBOR settings after end-2021 on a synthetic basis, for one additional year. The synthetic basis refers to the changed methodology by which the IBA will continue to provide rates after end-2021, reflecting the cessation of reporting by panel banks. These rates will not represent the underlying market and economy as the widely reported LIBOR rates had traditionally been (or supposed to be).

This goal of the extension, according to the FCA, “would be intended primarily to protect market integrity by allowing more time for transition away from Japanese yen LIBOR to complete.” Further, the FCA does not “envisage using our proposed powers to compel IBA to continue to publish any Japanese yen LIBOR settings after end-2022, and publication of these settings will consequently cease permanently immediately after a final publication on 30 December 2022.” However, the FCA left open the possibility of further extensions: “we will continue to consider the case for using these proposed powers also to require continued publication on a synthetic basis of the 1-month, 3-month and 6-month US dollar LIBOR settings for a further period after end-June 2023, taking into account views and evidence from the U.S. authorities and other stakeholders.”

Finally, the announcement also triggers an “Index Cessation Effective Date” under ISDA derivatives contracts. This means that the fallback spread adjustment has become fixed with the FCA’s announcement. The spread adjustment is added to SOFR to make the replacement rate representative.²

Impact Analysis

The main immediate impact of this announcement is that it could constitute a Benchmark Transition Event under a hardwired or amendment approach to transitioning away from LIBOR. These are standard-form clauses that address how the lenders and loan parties should proceed when LIBOR ceases being a benchmark interest rate. A Benchmark Transition Event is triggered when a regulator or administrator of LIBOR (such as the FCA) announces that the benchmark is no longer representative or that the administrator has ceased or will cease to provide the benchmark.

Right now, in most hardwired LIBOR transition clauses, this means that the administrative agent must notify the borrower and lenders of the event. Or, in a bilateral loan, the lender must notify the borrower. Such notice could begin the waiting period to amend a credit agreement to address a new benchmark rate in credit agreement using the amendment approach to LIBOR cessation. The LSTA has provided a draft notice based on the FCA’s announcement to members.³ Otherwise, the only other immediate impact is that a Benchmark Transition Event is a potential condition to a Benchmark Replacement Date, which would then be the date at which LIBOR will no longer be provided (i.e., the outside dates provided in the FCA’s announcement).

You should review your credit agreement to see if notice is required at this point, and if so, inform your client.

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Related Content

1.“FCA Announcement on Future Cessation and Loss of Representativeness of the LIBOR Benchmarks”. 2. For the fixed spread adjustment, see the announcement here. 3. The LSTA has provided a draft notice based on the FCA’s announcement to members, found here.