Tuesday, December 1, 2020
On November 30, ICE Benchmark Administration (“IBA“), the administrator of LIBOR, introduced a session on its intention to stop publishing USD LIBOR (1) within the case of 1-week and 2-month LIBOR, on December 31, 2021; and (2) within the case of in a single day, 1-, 3-, 6- and 12-month LIBOR, on June 30, 2023. It was beforehand anticipated that IBA would announce their intention to stop publishing all tenors of USD LIBOR on December 31, 2021. In separate statements, U.S. banking regulators and the UK Monetary Conduct Authority (the “FCA“) welcomed the IBA announcement. The announcement follows IBA’s beforehand introduced session on its intention to stop euro, sterling, CHF and yen LIBOR on the finish of 2021.
IBA introduced that, primarily based on suggestions from USD LIBOR panel banks and discussions with the FCA and different regulatory authorities, it’ll seek the advice of on the intention to stop publication of USD LIBOR. IBA indicated that it intends to shut the session for suggestions on the finish of January 2021.
The Regulators’ Statements
The FCA (which regulates IBA) “welcome[d] and help[ed]” the transfer by IBA and mentioned that it’s going to coordinate with U.S. authorities and authorities in different jurisdictions to think about the way to most appropriately restrict new use of USD LIBOR after the top of 2021. The FCA additionally famous that below the Monetary Companies Invoice launched in Parliament in October 2020, it could obtain new powers to ban use by supervised entities within the UK of a “important benchmark” (comparable to LIBOR) and mentioned that it “might train this energy if we contemplate doing so protects customers or market integrity.” The FCA additional indicated that (1) it plans to seek the advice of within the second quarter of 2021 on a proposed coverage strategy to the usage of authority to ban some or all new use of USD LIBOR and (2) doesn’t count on to make use of the ability earlier than the top of 2021. The FCA additionally reiterated encouragement for market contributors to transition away from LIBOR, together with by adhering to the IBOR Fallbacks Protocol (the “Protocol“) revealed by the Worldwide Swaps and Derivatives Affiliation (“ISDA”). The FCA additionally explicitly mentioned that its assertion shouldn’t be learn as an announcement that USD LIBOR has ceased or will stop, or that it’s not or is not going to be “consultant” for functions of the Protocol. (ISDA individually issued a assertion noting that the IBA and FCA statements don’t represent an “index cessation occasion” below the Protocol or the latest amendments to the 2006 ISDA Definitions.1 Following the outcomes of the IBA session, IBA’s announcement that it’s going to stop publishing USD LIBOR as of a sure date is anticipated to represent an “index cessation occasion” for functions of the Protocol, and the unfold adjustment between LIBOR and SOFR—the really useful substitute price for USD LIBOR—can be calculated as of the date of such announcement.)
Individually, the Federal Reserve Board, the Federal Deposit Insurance coverage Company (the “FDIC”) and the Workplace of the Comptroller of the Forex (the “OCC”) issued a joint assertion to encourage banks to transition away from USD LIBOR “as quickly as practicable.” The regulators mentioned that extending LIBOR tenors via June 30, 2023 “would enable most legacy USD LIBOR contracts to mature earlier than LIBOR experiences disruptions.” The assertion additionally cautioned that “failure to organize for disruptions to USD LIBOR, together with working with insufficiently sturdy fallback language, might undermine monetary stability and banks’ security and soundness” and that getting into into new contracts utilizing USD LIBOR as a reference price after December 31, 2021 “would create security and soundness dangers and [we] will look at financial institution practices accordingly.” The assertion acknowledged, nevertheless, that there “could also be restricted circumstances” when it could be acceptable to enter into new USD LIBOR transactions and gave the next examples: (1) transactions executed for required participation in clearinghouse motion procedures; (2) market making in help of consumer exercise associated to USD LIBOR transactions executed earlier than January 2022; (3) transactions that hedge or scale back a financial institution or financial institution consumer’s USD LIBOR publicity on contracts entered into earlier than January 2022; and (4) novations of USD LIBOR contracts executed earlier than January 2022.
The statements from IBA, the FCA and the U.S. banking regulators had been “applauded” by the Various Reference Charges Committee, a bunch that was convened by the Federal Reserve Board and the New York Fed to publish industry-recommended fallbacks for LIBOR-referencing contracts.
IBA’s announcement comes on the heels of the testimony earlier than the Home Monetary Companies Committee by Randal Quarles, Vice Chair of Supervision to the Federal Reserve, wherein he indicated that federal laws to supply a repair for LIBOR-referencing contracts can be “in the end required” however was not urgently wanted.
Abstract and Concerns
The statements from IBA and the regulators are extraordinarily important to market contributors engaged on a transition away from USD LIBOR and are prone to be adopted by additional clarifications and market developments. For now, it appears clear that regulators have been persuaded to allow USD LIBOR to outlive, at the very least for “legacy” transactions, for at the very least 18 months longer than most had beforehand anticipated. It’s seemingly, nevertheless, that regulators on each side of the Atlantic will proceed to press for monetary establishments to transition from USD LIBOR as quickly as practicable, regardless of the prolonged timetable for legacy USD transactions.
1 A Cadwalader memorandum discussing the Protocol is accessible right here.
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