Changes to LIBOR administration in the U.S. and UK
Real Estate | Kennett Square, PA
SummaryThe FCA and IBA proposed changes to their respective administration of GBP LIBOR and USD LIBOR towards the end of 2020, as the LIBOR transition nears its original 2021 deadline. Details are below about the proposed legislation (FCA) and the extension of certain LIBOR tenors into 2023 (IBA).
The FCA's proposed new powers over LIBOR
There have been several updates regarding the IBOR transition over the past months. First, in the U.K., the Financial Conduct Authority (FCA) has proposed modifications to EU legislation which would give the FCA enhanced powers to designate a critical benchmark as unrepresentative and require changes to such benchmarks (here). Currently, the FCA has identified only two IBORs that could be subject to these enhanced powers: GBP LIBOR and USD LIBOR.
Under existing legislation, the FCA has the right to declare a benchmark non-representative of the underlying market. Per the newly proposed Financial Services Bill (FS Bill), the FCA can either declare a benchmark non-representative and prohibit ongoing use of the benchmark as of a date identified by the FCA. Alternatively, if the representativeness of the benchmark may be restored, the FCA could compel the benchmark administrator to make certain changes to the way the benchmark is determined. For tough legacy contracts which cannot easily transition to an alternate rate, the FCA is permitted to require the continued publication of a synthetic rate allowing these legacy contracts to continue referencing critical benchmarks without repapering. The FS Bill would authorize the FCA to mandate the continued publication of the synthetic rate for up to ten years, analyzed annually.
The authority outlined in the FS Bill would only apply to contracts which are in scope of EU’s Benchmark Regulation (BMR). Certain cash products, such as loan agreements, are not subject to BMR and parties should be aware of any mismatches in methodologies for determining fallback rates.
Some LIBOR tenors extended to 2023
Second, in the U.S., the administrator of LIBOR has issued a statement that certain USD LIBOR tenors may continue to be published until June 30, 2023 (here). This statement was followed by statements of support from the US Banking Regulators (here). This extension only pertains to certain USD LIBOR indices; the publication of all sterling, euro, Swiss franc and yen LIBOR is expected to cease by the end of 2021. The FCA has indicated an intention to coordinate an orderly wind down with US authorities, but any decisions related to the transition away from LIBOR must also track with their policy statement.
These proposals have yet to be finalized and the relevant regulatory bodies continue to consult with market participants for feedback before issuing final determinations.
Speak to a Chatham expert
Find out how new LIBOR regulation might affect your your loans and derivatives.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.21-0009
Our featured insights
Answers to five key questions as you prepare for LIBOR cessation and the fall back to SOFR
With 2023 and the cessation of LIBOR officially upon us, some companies are opting to let their debt and interest rate hedges “fall back” through the adoption of standard language. While it might appear that this is the most straightforward way to manage the transition, there are five main...
2023 corporate treasury trends
Corporate treasury and accounting teams face a daunting list of concerns as they plan for 2023. Inflation at multi-decade highs, a war in Europe for the first time in 75 years, global central bank tightening, a roller coaster ride in on equity prices, and recession fears all pose challenges to...
Adjustable Interest Rate (LIBOR) Act Update
On Friday, December 16, the Federal Reserve Board adopted the final rule to implement the Adjustable Interest Rate (LIBOR) Act. The final rule identifies benchmark rates based on the Secured Overnight Financing Rate (SOFR) that will replace LIBOR in certain financial contracts after June 30, 2023.
7 ways to maximize FX and commodity hedging impact while minimizing costs
Hedge program costs can range from forward points, to trading costs, to fixed and variable operational costs that include systems and personnel. Program benefits often include risk reduction, operational ease, and favorable accounting treatment. This article will address leading practices and...
Derivatives Market Update for Financial Institutions
We are excited to share market insights, best practices, and product enhancements from our advisory teams focused on community and regional financial institutions. Topics will include borrower swaps, balance sheet risk management, hedge accounting, and regulatory compliance, among others.
Chatham's Q4 2022 outlook: Inflation, market volatility, and LIBOR transition
Watch Chatham's Managing Partner and Chair, Amol Dhargalkar, discuss key trends for the upcoming quarter like inflation, market volatility, and LIBOR transition.
In Commercial Property Executive, Robert Mangrelli discusses how the capital markets are reacting to higher interest rates
In a Q&A with Commercial Property Executive, Robert Mangrelli examines how the Federal Reserve's recent interest rate hikes are changing the landscape of commercial real estate's capital markets.