June 2023 LIBOR update

The impact of LIBOR cessation may not be the same for exposures across different jurisdictions and different asset classes, as industry conventions and legislative solutions – see further in the text - differ between derivatives and loan markets. Therefore, relying on standard fall-back language or legislation to transition a loan hedged with a derivatives contract, may affect your cash-flows in unexpected ways.    

We encourage you to review your remediation plans and determine whether recent supervisory announcements and legislative changes – see further in the text - may mean that adjustments are needed.

LIBOR is ceasing at the end of June. If you haven’t done so yet, the time to act is now.

On 3 April the UK Financial Conduct Authority (FCA), which supervises LIBOR’s administrator IBA, announced that it would require IBA to continue the publication of 1-,3- and 6-month USD LIBOR settings for a short period after 30 June 2023, using an unrepresentative ‘synthetic methodology’ (‘synthetic USD LIBOR’). It is the stated intent that the publication of these LIBOR settings cease on 30 September 2024. 

Whilst this means that ‘LIBOR’ will continue to be published on the screens after 30 June, synthetic LIBOR can only be used in legacy contracts, where applicable and it cannot be used in new contracts. Additionally, regulators have made it clear that synthetic LIBOR is not intended for use in contracts that would need to be amended to enable its use, and cannot be used in cleared derivatives.   

The FCA has highlighted that market participants should not rely on the availability of synthetic LIBOR rates in place of active transition of legacy contracts. Synthetic LIBOR rates provide only a short-term, temporary bridge to alternative robust reference rates.

US law governed contracts – legislation in the US

In December, the Federal Reserve Board published regulations to implement the ‘the US LIBOR Act’. This Act establishes a process to move contracts governed by US law that contain no, or unworkable, fall-backs, to alternative rates when the US dollar LIBOR panel ends. The exact make-up of the replacement rate, which is SOFR based and includes an adjustment spread, varies per asset class. It is consistent with previously published guidance on fall-back rates from the NY Fed’s Alternative Reference Rates Committee (ARRC) and ISDA.

Whilst synthetic LIBOR and the provisions of the US LIBOR Act may mitigate the risk of widespread contractual challenge, we emphasise that the public sector has been very clear that one should not delay the transition of legacy contracts to the new rate.

LIBOR is ending. We are here to help.