LIBOR transition timing update — the regulators have spoken

On March 5, a series of announcements and guidance by the UK Financial Conduct Authority (FCA), the ICE Benchmark Administration (IBA), the International Swaps and Derivatives Association (ISDA), and Bloomberg, answered a number of open questions regarding the timing of the end of publication of all LIBORs. At the same time, these announcements gave rise to new questions that likely will be addressed over the course of 2021. Most notably, one- and three-month USD LIBOR will be published through June 30, 2023, while all GBP LIBOR settings will be published through December 31, 2021. However, it’s possible that the most common USD LIBOR and GBP LIBOR will be published under a “synthetic” methodology beyond those dates.

These announcements do not provide definitive or “across the board” guidance regarding how all loans and derivatives will fall back, and we continue to advise our clients to inventory their loan portfolio to understand the impact (or lack thereof) and to prepare an action plan.

What do the FCA, IBA, ISDA, and Bloomberg announcements mean for LIBOR transition?

These are the most salient points from these announcements:

• After considering the 55 responses to its recent consultation, IBA plans to continue to publish LIBORs as follows:
  • To be published through December 31, 2021 (and no longer representative thereafter):
    • All settings of Euro (EUR) LIBOR, Swiss franc (CHF) LIBOR, Japanese Yen (JPY) LIBOR, and Sterling (GBP) LIBOR
    • One-week and two-month US Dollar (USD) LIBOR
  • To be published through June 30, 2023 (and no longer representative thereafter): overnight, one-month, three-month, six-month, and twelve-month USD LIBOR
• The FCA plans to consult on whether to compel the IBA to continue to publish LIBOR under a new methodology (i.e., “synthetic” LIBOR), subject to enactment of the Financial Services Bill by Parliament, for the following LIBORs:
  • GBP LIBOR: one-, three-, and six-month settings
  • JPY LIBOR: one-, three-, and six-month settings through December 30, 2022
• The FCA will “continue to consider” whether to compel IBA to publish synthetic one-, three-, and six-month USD LIBOR beyond June 30, 2023
• The FCA’s Statements of Policy will outline the methodology for IBA to publish synthetic LIBOR, though it generally amounts to the forward-looking term rate of the relevant RFR, plus a spread adjustment as per ISDA (i.e., five-year historical median difference between the IBOR and RFR)
• The FCA would permit the use of synthetic LIBOR in "legacy contracts," rather than new ones, subject to the results of an FCA consultation later in 2021
• In light of these announcements, Bloomberg published ISDA spread adjustments, which will apply to adjusting rate fixings in derivatives that fall back to an alternative index like SONIA or SOFR, for all impacted LIBORs, including the following:
  • GBP LIBOR: one-month (0.0326%); three-month (0.1193%)
  • USD LIBOR: one-month (0.11448%); three-month (0.26161%)

What are the main takeaways?

These announcements confirm the expected timetables for continued publication of most USD LIBOR currencies and tenors — most relevant from the perspective of our clients, that GBP LIBOR will be published through the end of this year and that one- and three-month USD LIBOR will be published through mid-2023. They also set the ISDA spread adjustments, which provides more concrete guidance around the calculation of the fallback rate.

With that, they also leave open the possibility of LIBOR’s continued existence for legacy contracts, in some form or fashion. Notably, the FCA has indicated that they “will consult on” continued publication (beyond the end of this year) of “synthetic” LIBOR for various tenors of GBP LIBOR and JPY LIBOR, and that they will “continue to consider” (i.e., not necessarily consult on) whether to do the same for USD LIBOR beyond mid-2023.

What do LIBOR-based borrowers need to do?

We continue to recommend that LIBOR-based borrowers inventory their loan portfolio to understand the impact (or lack thereof), of the cessation event, and to prepare an action plan. While these announcements and guidance seem to answer some questions around timing of LIBOR cessation and setting of spread adjustments, they give rise to other questions around what will constitute a legacy contract and whether synthetic LIBOR will exist after the cessation date. A key point of difference of impact for derivatives and loans is that this announcement further exposes the mismatch between a LIBOR-referenced loan and a LIBOR-referenced derivative. Please reach out to your Chatham contacts to discuss how we can continue to support you through the LIBOR transition.

Announcements and guidance

• FCA
  • Announcement on future cessation and loss of representativeness of the LIBOR benchmarks
  • Benchmarks Regulation and proposed amendments under the Financial Services Bill
• IBA: ICE LIBOR Feedback Statement on Consultation on Potential Cessation
• ISDA
  • Future Cessation and Non-Representative Guidance
  • derivatiViews (CEO’s blog): LIBOR Cessation and the Impact on Fallbacks
• Bloomberg: Announcement - Spread Fixing Event for LIBOR