On Monday, November 30, 2020, ICE Benchmark Administration (“IBA”), as administrator of LIBOR, announced that it will consult in early December 2020 on its plan to cease publication of the overnight and one-, three-, six- and 12-month U.S. Dollar LIBOR (“USD LIBOR”) settings immediately following the LIBOR publication on June 30, 2023.[1] This announcement represents an effective extension of the end date for USD LIBOR, which previously was expected to cease following 2021.
Concurrent with IBA’s announcement, response statements were published by the UK Financial Conduct Authority (“UK FCA”) and a group comprised of The Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency (the “U.S. Banking Regulators”). In its response, the UK FCA expressed support for IBA’s extension of most USD LIBOR tenors. The response published by the U.S. Banking Regulators (who, together, generally exercise federal supervisory authority over banks located in the U.S.) was directed at the practices of banks located in the U.S.[2] Both the UK FCA and the U.S. Banking Regulators encouraged market participants to continue to transition away from use of USD LIBOR.[3]
The IBA’s announcement and response by the UK FCA follow upon and refer to recent announcements by the IBA and UK FCA that we previously discussed on the MW LIBOR Transition Blog.[4]
Summaries of and hyperlinks to IBA’s announcement and the response statements published by the UK FCA and U.S. Banking Regulators are set forth below, followed by a summary of key takeaways in connection with these developments.
IBA’s Announcement
- IBA announced that it will consult on its intention to cease the publication of the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021, and the remaining USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.[5]
- IBA stated that its plans are “based on feedback and information received from the panel banks” and reflect “discussions with the FCA and other official sector bodies,” suggesting that ICE believes its proposed extension of most USD LIBOR tenors has support among panel banks and relevant regulatory bodies.
- However, IBA cautioned that “any publication of the overnight and one, three, six and 12 month USD LIBOR settings based on panel bank submissions beyond December 31, 2021 will need to comply with applicable regulations, including as to representativeness.”
- IBA expects to commence its consultation in early December 2020 and close the consultation for feedback by end of January 2021.
- IBA’s announcement can be located here: ICE Benchmark Administration to Consult on Its Intention to Cease the Publication of One Week and Two Month USD LIBOR Settings at End-December 2021, and the Remaining USD LIBOR Settings at End-June 2023.
Response Statement by UK FCA
- The UK FCA expressed support for IBA’s announcement, stating: “We welcome and support the extension by panel banks and IBA, together with the proposal to consult on a clear end date to the [USD] LIBOR panel, following discussions with the [USD] LIBOR panel banks.”
- The UK FCA also stated that it “welcomed the supervisory guidance in relation to limiting new use of [USD] LIBOR after end-2021 from [the U.S. Banking Regulators]” and that it will “coordinate with the US authorities, and relevant authorities in other jurisdictions, to consider whether and, if so, how most appropriately to limit new use of [USD] LIBOR, consistent with our objectives of protecting consumers and market integrity.”
- The UK FCA emphasized that it “will continue to consider evidence and views on whether it would be both necessary and feasible for us to use any proposed new powers under the Financial Services Bill to support any ‘tough legacy’ contracts in the case of more heavily used [USD] LIBOR settings as transition progresses.”
- Under the Financial Services Bill, which was introduced to the UK Parliament on October 21, 2020, the UK FCA would receive new powers, including the power to require continued publication of critical benchmarks such as USD LIBOR on the basis of a changed methodology in certain circumstances.
- The UK FCA previously indicated that it may exercise such power to require a change to the LIBOR methodology (and continued publication of such modified LIBOR) in certain circumstances where “LIBOR currency-tenor settings are widely used in outstanding contracts and/or instruments that cannot practicably be transitioned away from the benchmark rate by actions or agreements by or between contract counterparties themselves (i.e. ‘tough legacy’ contracts).”
- The UK FCA also encouraged market participants which are parties to legacy LIBOR contracts to continue work to convert these contracts or adopt robust fallbacks.
- The UK FCA’s response statement can be located here: FCA response to IBA’s proposed consultation on intention to cease US$ LIBOR
Response Statement by U.S. Banking Regulators
- The U.S. Banking Regulators indicated that the purpose of their statement is to “encourage banks to transition away from USD LIBOR as soon as practicable.”
- The U.S. Banking Regulators expressed their view that “failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness.”
- In light of such potential safety and soundness risk, the U.S. Banking Regulators indicated they will “will examine bank practices accordingly.”
- The U.S. Banking Regulators “encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021,” subject to certain limited exceptions specified in the U.S. Banking Regulators’ response statement.
- The U.S. Banking Regulators’ response statement can be located here: Statement on LIBOR Transition – November 30, 2020 (federalreserve.gov)
Key Takeaways
Key takeaways in connection with IBA’s announcement and responses published by the UK FCA and U.S. Banking Regulators include:
- It appears likely USD LIBOR for most tenors will survive until the end of June 2023; however, IBA has not yet published its consultation and the proposed extension is not a done deal. Banks and other market participants should continue to monitor developments closely.
- IBA’s announcement does not affect the target end date—which remains end-2021—for GBP, EUR, CHF and JPY LIBOR.
- Assuming IBA’s proposed timeline is adopted in its current form, market participants will have some additional time to: (i) pursue efforts to remediate their legacy USD LIBOR instruments and (ii) push for adoption of legislation designed to address the problem of “tough legacy” contracts, such as the legislation that has been proposed by the ARRC for enactment in New York State.
- The extent to which IBA’s proposal—if adopted—will affect a given company’s existing LIBOR transition plans necessarily depends on a number of factors specific to that company. Such factors include, for example: (i) the company’s (and its counterparties’) present ability to use alternative reference rates such as SOFR, (ii) the maturity profile of the company’s existing USD LIBOR instruments, (iii) the fallback provisions (if any) included in such legacy instruments, and (iv) the company’s assessment of potential litigation and other risks relating to such instruments. However, as emphasized by statements of the UK FCA, the Federal Reserve Board and the other U.S. Banking Regulators in their announcements, it is clear that companies should continue with their efforts to transition away from LIBOR as they continue to monitor these developments.
1. IBA also announced that it plans to cease the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021.
2. In a separate press release, the Federal Reserve Board stated that it “welcomed and supported” the IBA’s plans, echoing wording used by the UK FCA in its response.
3. IBA’s announcement and the responses published by the UK FCA and the U.S. Banking Regulators also included disclaimers to the effect that the relevant statement should not be read as an announcement that the IBA will cease publication of any LIBOR settings after a certain date or that LIBOR has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative.
4. ICE Benchmark Administration and UK FCA Announce LIBOR Endgame Consultations, liborblog.com
5. IBA’s announcement follows its announcement on November 18, 2020, that it would consult on its intention to cease the publication of all GBP, EUR, CHF and JPY LIBOR settings immediately following the LIBOR publication on December 31, 2021.
