Today marks an important milestone in LIBOR transition, with a formal announcement from the FCA that publication of most LIBOR settings will cease at the end of 2021.
In a smoothly orchestrated move highlighting the importance of today’s news, derivatives trade body ISDA has announced guidance in relation to the announcement and ICE Benchmark Administration (IBA), the LIBOR administrator, has released its feedback statement following its previous consultation on cessation.
The announcement constitutes a formal index cessation event for documentation including the ISDA IBOR Fallbacks Supplement and results in the credit adjustment spreads that will be applied to risk-free rates being fixed.
As expected, IBA and the FCA have confirmed that most LIBORs will stop being published from 31 December. Overnight and 12-month US dollar LIBOR will stop being published from 30 June 2023.
Under the Financial Services Bill currently before Parliament, the FCA would have power to designate, change the methodology of and compel publication of critical benchmarks. In today’s announcement, the FCA announced that they will consult on exercising these powers in relation to 1-month, 3-month and 6-month sterling, yen and US dollar LIBOR. This power to create “synthetic” LIBORs would become important for so-called “tough legacy” contracts.
The FCA clearly states that all LIBOR settings will remain representative while they remain published on existing methodology, but that any “synthetic” LIBOR settings would be unrepresentative of the underlying market. As a result, for ISDA and similar documentation purposes, today’s announcement constitutes a formal Index Cessation Event for all LIBOR settings, either by the announcement of final publication dates or “unrepresentativeness” pre-cessation triggers.
More specifically, for the purposes of the ISDA IBOR Fallbacks Protocol and IBOR Fallbacks Supplement:
An Index Cessation Event occurs today, 5 March 2021, in respect of all LIBOR settings currently published by IBA
The Index Cessation Effective Date for all US dollar LIBOR settings will be 1 July 2023, because from that date no longer/shorter tenors will be provided for any settings, or those tenors will be unrepresentative
The Index Cessation Effective Date will occur on 1 January 2022 for all other IBOR settings, including all sterling LIBOR tenors, on the basis that they will not be provided or, if provided in “synthetic” form, will be unrepresentative
5 March 2021 will be the “Spread Adjustment Fixing Date” for all LIBOR settings, meaning that Bloomberg Index Services Limited will now publish the definitive credit adjustment spreads for all settings
Market participants should continue with their risk-free rate transition plans in earnest. While not unexpected, today’s announcements put to rest any lingering question as to whether LIBOR transition might be extended beyond the end of 2021. Furthermore, market participants are unlikely to receive firm assurances as to whether and how they will be able to rely on synthetic LIBOR for tough legacy products until later in the year following the outcome of the FCA consultation announced today.
It is helpful that today’s announcement has been made before the end of this month, being the milestone by which new LIBOR should cease recommended by the Working Group on Sterling Risk-Free Reference Rates. For instance, the fixing of the credit adjustment spread should allow a fixed spread to be referenced in loan documentation, potentially reducing complexity of documentation and risk of mismatch with any linked hedging.
For further information, please see:
The FCA’s announcement here
ISDA’s guidance here
IBA’s feedback statement here
Our LIBOR Transition Insight here
To discuss this important development, or for any other help with your LIBOR transition, please contact any member of our IBOR transition team or your normal CMS contact.