Disclosure relating to transactions which reference LIBOR and which have a termination date beyond 31 December 2021 [For Use Prior to Implementation of new Fallbacks in 2006 ISDA Definitions]

It is uncertain whether USD/GBP/JPY/CHF/EUR LIBOR will continue to be produced and published after the end of 2021. If USD/GBP/JPY/CHF/EUR LIBOR (as relevant) is discontinued during the term of your transaction with us, the contractual terms may provide a process for determining a fallback but it is unclear and uncertain what rate your transaction would reference as a result of this process.

In addition, contracts relying on LIBOR may not perform as expected, both when LIBOR ends and potentially before that. That is because liquidity in LIBOR-referencing instruments is likely to decline, and there may not be sufficient transaction-based submissions to LIBOR in future for the rate to remain ‘representative’ of the underlying market.

Due to this lack of clarity and certainty, there is no way to know at this time whether you would be disadvantaged economically. Timing for any discontinuation of LIBOR may vary across different currencies and tenors in which LIBOR is currently produced and such timing may differ from the timing for any discontinuation of other interbank offered rates (IBORs). In addition, the discontinuation of LIBOR may result in a mismatch between the rate referenced in your transaction and your other financial instruments, including, potentially, those instruments intended as hedges, and loans which your transaction is intended to hedge.

The International Swaps and Derivatives Association, Inc. (ISDA) is amending certain ‘floating rate options’ in the 2006 ISDA Definitions to include fallbacks that would apply upon the permanent discontinuation of certain key IBORs and upon a ‘non-representative’ determination for USD/GBP/JPY/CHF/EUR LIBOR. ISDA is also amending certain floating rate options that use USD LIBOR as an input to include fallbacks that would apply if USD LIBOR is permanently discontinued or upon a ‘non-representative’ determination for USD LIBOR. As it has done from time to time, ISDA will amend the 2006 ISDA Definitions by publishing a ‘Supplement’ to the 2006 ISDA Definitions on January 25, 2021. Upon publication of the Supplement for the relevant IBOR, transactions incorporating the 2006 ISDA Definitions that are entered into on or after the date of the Supplement (i.e., January 25, 2021 which is the date that the 2006 ISDA Definitions are amended) will include the amended floating rate option (i.e., the floating rate option with the fallback). Transactions entered into prior to the date of the Supplement (so called “legacy derivative contracts”) will continue to be based on the 2006 ISDA Definitions as they existed before they were amended pursuant to the Supplement, and therefore will not include the amended floating rate option with the fallback..

ISDA has published a protocol to facilitate multilateral amendments to include the amended floating rate options, and therefore the fallbacks, in legacy derivative contracts. 

In order to avoid the lack of clarity regarding the rate that your transaction would reference upon the discontinuation of USD/GBP/JPY/CHF/EUR LIBOR, you may wish to consider either (i) adhering to the protocol ISDA has published to include the new fallbacks in existing derivative contracts such as your transaction; or (ii) bilaterally amending your transaction to include the new fallbacks.  Adherence to the ISDA protocol will amend ISDA derivatives contracts with other adhering parties so that such contracts include the new ISDA fallbacks but will not result in inclusion of the fallbacks in derivatives contracts with counterparties that do not adhere. The ISDA protocol will provide for standard amendments to include the new ISDA fallbacks but bilateral amendment agreements could also amend derivatives contracts with the counterparty to that agreement on terms that are mutually agreeable.

ISDA has stated that it is aware that arrangements other than or in addition to adherence to the ISDA protocol or amending or supplementing the contractual terms of transactions with comparable proposed fallbacks may be required for swaptions, caps, floors, forward rate agreements, and in-arrears swaps.

Even after ISDA implements the fallbacks in its definitions and through the protocol, the discontinuation of LIBOR and the application of these fallbacks may result in a mismatch between the rate referenced in your transaction and in your other financial instruments including, potentially, those instruments intended as hedges, and loans which your transaction is intended to hedge.

You should review the terms of your transaction and your other financial instruments to determine if adhering to the protocol published by ISDA or entering into appropriate bilateral amendments will meet your hedging and/or other objectives.  You should also consider the tax, accounting and regulatory implications of executing and then potentially amending your transaction.  As nothing in this document should be taken to be advice, we encourage you to seek independent advice on these matters.

For more information on benchmark reform related to LIBOR and other IBORs, as well as specific information about the relevant rates, see https://www.isda.org/2019/09/10/supplement-to-the-plain-english-disclosures-for-derivatives-referencing-libor-and-other-ibors/.