IBA announces consultation on USD LIBOR cessation
On 30 November 2020, ICE Benchmark Administration Limited (IBA) announced plans to consult on its intention to cease publication of USD LIBOR. This follows its announcement last month that it plans to consult shortly on the cessation of Sterling, Euro, Swiss Franc and Japanese Yen LIBOR after 31 December 2021 (covered in our briefing).
In the announcement, IBA says that it plans to consult in early December on its intention to cease publication of:
- 1-week and 2-month USD LIBOR settings, after publication on 31 December 2021; and
- all remaining USD LIBOR settings, after publication on 30 June 2023.
The USD LIBOR consultation is expected to close by the end of January 2021 and should provide further clarity on how – and, crucially, when – IBA intends to bring about USD LIBOR cessation.
IBA expressly states that the announcement should not be taken to mean that the publication of any LIBOR settings will continue or cease after 31 December 2021 or 30 June 2023. It also notes that continued publication of any USD LIBOR rate will need to comply with applicable regulations, including as to its continued representativeness after 31 December 2021.
FCA announces future consultation on new powers
The FCA welcomed IBA's announcement as providing an incentive to swift transition while allowing time to address legacy USD LIBOR contracts.
In a coordinated move, the FCA also announced plans to consult in Q2 2021 on proposed powers expected to be granted under the forthcoming Financial Services Bill enabling it to prohibit new use in the UK of a critical benchmark where the administrator has confirmed that provision of the benchmark will cease.
The FCA says that it will coordinate with US and other authorities to consider whether and how to limit future use of USD LIBOR, and that it will continue to consider whether it would be necessary and feasible to "support" any "tough legacy" contracts and instruments referencing the more heavily used USD LIBOR rates. This would presumably take the form of an exemption of such contracts and instruments from any prohibition, in accordance with the new powers to be conferred on the FCA under the Financial Services Bill. You can read more about the FCA's considerations of tough legacy contracts in our previous briefing.
In its announcement, the FCA encourages market participants to actively transition away from LIBOR in order to achieve certainty and control over contractual terms following LIBOR's cessation or loss of representativeness. The FCA also expressly states that its statement should not be interpreted as an announcement that LIBOR has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative for the purposes of contractual fallback triggers (in particular, those adopted under ISDA documentation).
US encourages active transition and use of alternative rates except in certain circumstances
Relatedly, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the US Agencies) issued a joint statement encouraging banks to transition away from USD LIBOR, and recommending that US banks stop entering into USD LIBOR contracts as soon as practicable and, in any event, before 31 December 2021. Moreover, they say that new contracts entered into before 31 December 2021 that do reference LIBOR should incorporate robust fallback language that includes a clearly defined alternative reference rate for use following LIBOR's discontinuation.
However, the US Agencies go on to acknowledge in their statement that, if publication of USD LIBOR is extended beyond the end of 2021, as proposed, there may be limited circumstances in which it would be appropriate for a bank to enter into new USD LIBOR contracts thereafter, including:
- where transactions are entered into as part of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD LIBOR exposure;
- market-making in support of client activity related to USD LIBOR transactions executed before 1 January 2022;
- transactions that reduce or hedge its or its clients' USD LIBOR exposure on contracts entered into before 1 January 2022; and
- novations of USD LIBOR transactions entered into before 1 January 2022.
ISDA confirms no trigger event
ISDA responded to these developments by confirming that none of the announcements constitutes an "index cessation event" under Supplement 70 to the 2006 ISDA Definitions or triggers any fallback provisions under the 2018 ISDA Benchmarks Supplement.
Authors: Alex Biles, Amelia Howison and Kirsty McAllister-Jones.
