LIBOR discontinuance: meeting regulatory milestones
With the input of ISDA, preparation in the derivatives market is further ahead than the cash/loans market. However, both markets are interlinked and, with pressure from regulators increasing, the cash/loans market is catching up.
A reminder of some key milestones applicable to financial institutions in the UK is set out below:
- The FCA announcement on 5 March 2021 confirms the cessation of all 35 LIBOR settings currently published by the ICE Benchmark Administration (IBA):
- GBP, CHF, JPY, EUR LIBOR (all tenors) ceases end 2021;
- USD LIBOR (one week and two month tenors) ceases end 2021; and
- remaining USD LIBOR tenors cease end June 2023.
- The regulatory message in the UK is to cease all USD LIBOR lending as soon as possible but, in any event, by end 2021.
- Best Practice Guide for GBP Loans (February 2021) milestones include:
- cease all new GBP LIBOR loans (expiring beyond end 2021) by end March 2021; and
- where viable, convert legacy GBP LIBOR loans (expiring beyond end 2021) to alternatives by end September 2021.
- ISDA has published a statement noting that the FCA announcement on 5 March 2021 constitutes an index cessation event under the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol for all 35 LIBOR settings.
Slightly different milestone dates are being pushed by regulators in different jurisdictions but the overall regulatory pressure to cease new IBOR transactions and convert legacy IBOR transactions as soon as possible is universal.
Recent developments in the UK include:
- HM Treasury has released a consultation on supporting parties to legacy LIBOR/EURIBOR contracts affected by the wind-down of critical benchmarks. The aim of the consultation is to understand the current levels of uncertainty around the LIBOR transition in particular, and to find ways to mitigate the adverse consequences of changes by the FCA to the operation of benchmark rates. The consultation is open for responses until Monday 15 March and can be accessed here.
- The Bank of England / Working Group on Sterling Risk-Free Reference Rates’ Q&As and Best Practice Guide for GBP Loans (February 2021) provide further guidance as to what is developing as market practice for new loans and the conversion of legacy facilities, both bilateral and syndicated. It also sets out an updated milestone, indicating that from the beginning of April 2021, all new GBP lending (including re-financing) expiring after the end of 2021 is to be based on SONIA or other non-LIBOR alternatives (ie no new LIBOR products expiring after the end of 2021). This also includes LIBOR linked products with built in rate-switch mechanisms - the focus being on ensuring compatibility with the new rates from the outset. In the January meeting of the Working Group, the Bank of England made it clear that it would take a ‘keen interest’ in any remaining GBP LIBOR lending after the end of Q1 2021. The Best Practice Guide for GBP Loans also provides details of recommended conventions and some guidance on adjustments for legacy contracts, but with a clear focus on ensuring communication between the parties to discuss their arrangements going forward.
- Forward-looking term SONIA rates (TSRR): ICE Benchmark Administration Limited and Refinitiv have begun live production of forward-looking term rates and FTSE Russell is also expected to make its TSRR available soon. However, the Working Group on Sterling Risk-Free Reference Rates still recommends a move to SONIA compounded in arrears (save for limited exceptions, including trade finance) and is unlikely to select a preferred administrator. In the USA, the Alternative Reference Rates Committee plans to select a term rate administrator.
As far as EURIBOR denominated facilities are concerned, the position is less urgent, with the European Central Bank still reviewing whether further amendments to calculation or a wholesale replacement of EURIBOR with a RFR is necessary/desirable. In the meantime, however, the amended EU Benchmarks Regulation came into effect on 13 February, providing the European Commission the power to deal with critical benchmarks in circumstances where the termination of those benchmarks would cause ‘significant disruption’ to the EU financial markets. The Working Group on Euro Risk-Free Rates is expected to publish recommendations later this year following its recent consultations on fallback rates and triggers.
Details of the growing number of RFR-based transactions are being published: see for example the LMA’s list of published transactions here. As market confidence in the RFR loan/cash products grows during 2021 and the pressure from regulators builds, it is likely the negotiations between parties to LIBOR legacy loan/cash products will intensify. Banks and financial institutions that the banking and finance team at Penningtons Manches Cooper is guiding through this process are all at differing stages; however, most now have the systems in place to adapt to compounded backward looking RFR for new facilities. The attention is now shifting to negotiating and amending the LIBOR legacy facilities. With many borrowers well advised and prepared for strategic negotiations of credit adjustment spreads across multiple lenders, there are some tough negotiations to be finalised quickly if regulators’ milestones are to be met.
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