GBP LIBOR transition market brief — Q4 2020
- December 9, 2020
Hedging and Capital Markets
Private Equity | London
Chatham's update on the GBP LIBOR transition, summarizing upcoming deadlines, recent news, and available resources to help you stay current as the market transitions away from LIBOR.
Q4 2020 Highlights in LIBOR-SONIA Transition
Introduction of the Financial Services Bill
On 21 October 2020, the Financial Services Bill was introduced to the House of Commons and given its first reading. This bill sets out amendments to the EU Benchmarks Regulation following the end of the Brexit transition period, some of which are related to the LIBOR transition.
In particular, the UK Financial Conduct Authority (“the FCA”) would be equipped with enhanced powers to manage and direct the orderly wind-down of LIBOR. Amongst these are the powers to direct a change in methodology for a critical benchmark in the event it has become unrepresentative, and to extend its publication for a limited time. This is viewed as an important step in safeguarding “tough legacy” contracts linked to LIBOR, which face insurmountable barriers to transition.
Should the FCA make use of these powers, UK supervised institutions would be prohibited from using the benchmark for all but a narrowly specified set of exempted contracts.
Launch of the ISDA Fallbacks Supplement and Protocol
On 23 October 2020, ISDA announced the launch of the ISDA Fallbacks Supplement and Protocol, both of which will come into effect from 25 January 2021.
The Supplement amends ISDA’s standard definitions for interest rate derivatives to incorporate robust and explicit fallbacks for certain IBORs, including GBP LIBOR.
The Protocol enables derivative counterparties to incorporate the Supplement’s amendments into their existing contracts. This is done by both counterparties adhering to the Protocol.
Users of derivatives for hedging purposes should be aware that neither the Supplement, nor the Protocol, amend the fallbacks in their underlying loan contracts. As a result, using the Supplement or adhering to the Protocol without a simultaneous amendment of the underlying loan contracts may result in a mismatch between the floating rate on the loan and the hedge.
Chatham recommends that market participants continue to prepare for this transition as though there will be no easing of timing, though extension of deadlines, whether interim or final, is always possible.
IBA consultation on cessation of GBP LIBOR
On 18 November, the ICE Benchmark Administration (the “IBA”) announced that it would launch a consultation on its intention to cease publication of GBP LIBOR after 31 December 2021. Similar consultations will be launched for EUR, CHF and JPY LIBOR. For most tenors of USD LIBOR, however, the equivalent IBA consultation proposes to cease publication on 30 June 2023. The announcement was welcomed by the FCA.
- Chatham has the following SONIA resources available:
- The Bank of England publishes SONIA by 9 a.m. each business day:
- Third update to roadmap by Bank of England Working Group on Sterling Risk-Free Reference Rates
Speak to a Chatham expert
Please reach out to the Chatham team if you have questions about how the LIBOR transition could impact 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.20-0465
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