In its announcement, the FCA made it clear that these nine tenors of LIBOR would no longer be representative after 30 June 2023 whether or not there was a determination to allow continued publication of a synthetic version of one or more of these tenors of LIBOR after that date. The FCA reminded market participants that, if permitted, the publication of Synthetic LIBOR would be intended to assist parties unable to transition tough legacy contracts by 30 June 2023.  Synthetic LIBOR will not be available for new contracts because, as noted above, is the LIBOR rate that a synthetic version continues would be unrepresentative for the purposes of UK BMR.

In its announcement, the FCA reminded market participants that the publication of Synthetic LIBOR is intended to assist parties to tough legacy contracts. Synthetic LIBOR will not be available for new contracts as the rate is unrepresentative for the purposes of UK BMR.

The FCA also published a series of statements of policy with respect to some of its enhanced powers under UK BMR. The FCA’s statements of policy provide further detail in relation to the policy framework with respect of the new methodology for Synthetic LIBOR and a forward-looking term rate of the relevant risk-free rate plus a fixed spread aligned with the spreads in the ISDA fallbacks.

GBP LIBOR

We are quickly approaching the Working Group on Sterling Risk-Free Reference Rates (Sterling Working Group) end of Q1 2021 milestone date from which the initiation of (a) new and re-financed sterling LIBOR linked loans and (b) new sterling LIBOR linked linear derivatives (in both cases that expire after the end of 2021) must cease.

The recommendation of the Sterling Working Group is that parties should have actively converted legacy sterling LIBOR contracts (if conversion is possible – see above on tough legacy contracts) by the end of Q3 2021.

Although LIBOR publication continues until the dates set out above, this does not mean that parties can wait until the final quarter of 2021 to take action in respect of both new and legacy contracts.

ISDA 2020 IBOR Fallback Protocol

The publication of the FCA announcement is an “Index Cessation Event” for the purposes of the ISDA IBOR 2020 IBOR Fallbacks Protocol (ISDA Protocol) and Supplement 70 to the 2006 ISDA definitions (the Supplement). Please see our guide in relation to the ISDA Protocol and Supplement for further information.

The technical notice published by Bloomberg Investment Services Limited, 5 March 2021 sets out the “Spread Adjustment Fixing Date” under the ISDA Protocol and Supplement for all tenors of LIBOR across all currencies. The FCA announcement provides market participants with welcome certainty in relation to the fixed spread adjustments that will apply to fallback rates.

The FCA announcement does not trigger any specific notice requirements as between ISDA counterparties, unless otherwise agreed to in their documentation. Specific notice provisions may be included in cash market fallback language and parties will need to determine whether such provisions require them to provide a notice in respect of the FCA announcement. In particular, depending on contract language, administrative agents and direct lenders under existing loan agreements may be required to give notice of this event to borrowers and/or other members of the bank group. Additionally, today’s announcement may have the effect under some loan agreements of triggering language which requires or allows the parties to amend the loan agreement to set a fallback interest rate. 

USD LIBOR

For the purposes of the ISDA Protocol and Supplement, the cessation of the 1-week and 2-month USD LIBOR tenors after 31 December 2021, will not trigger an Index Cessation Effective Date on that date. Instead, the Calculation Agent will interpolate the relevant rate by using the next shorter and next longer tenors until such method is no longer available (i.e. once the remaining tenors used for interpolation cease to exist or become non-representative after 30 June 2023).   

The FCA announcement fixed the adjustment spread that will be added to the ISDA fallback rate for derivatives (i.e. compounded SOFR) to minimize, to the extent possible, any value transfer upon the transition under the ISDA Protocol and Supplement. Furthermore, the ARRC announced on 30 June 2020, that it would be matching ISDA’s spread adjustments for non-consumer USD LIBOR contracts that have incorporated the Alternative Reference Rates Committee’s (ARRC) model hardwired fallback language.

The ARRC confirmed in a statement issued on 9 March 2021 that, under its recommended fallback language, which has triggers akin, but not identical, to the ISDA fallback provisions, the FCA’s announcement constitutes a “Benchmark Transition Event”. The ARRC previously published a statement commending the FCA announcement. The FAQs published by the ARRC provide further information in relation to the effect of the occurrence of a Benchmark Transition Event.

LMA Replacement of Screen Rate Clause

The publication of the FCA announcement may be a “Screen Rate Replacement Event” for the purposes of the UK Loan Market Association (LMA) template facility agreements. The implications will vary depending on the drafting used:

1. it could mean that amendments to replace LIBOR in a facility agreement can be made with Majority Lender consent rather than all Lender consent;
2. it may trigger good faith negotiations (either now or at a date later in 2021) to replace LIBOR;
3. there is a range of bespoke drafting in the loan market, particularly for bilateral loans, where there may be notification requirements or an amendment process triggered by the announcement.

It is worth flagging that the FCA announcement may not be an immediate Screen Rate Replacement Event. The LMA published a suggested pre-cessation trigger in October 2020, with the intention of picking up an FCA announcement, but this trigger will not be found in many facility agreements signed before that date (and there was no requirement for it to be added to facility agreements after that date). However, there may be other Screen Rate Replacement Events that could be apply as a result of the FCA announcement, for example the parties may agree that LIBOR is no longer appropriate for the purposes of calculating interest.

Loan market participants with LIBOR linked facility agreements need to consider their loan agreements in light of the FCA announcement to see what, if anything is triggered by the announcement. Even if the FCA announcement does not directly trigger an amendment or negotiation, it is a clear reminder that parties need to have a plan for active transition away from LIBOR.