Recently, the entity administering the London Interbank Offered Rate (LIBOR), a common benchmark for setting interest rates in commercial transactions, was changed. This change may require amendments to existing loan agreements and other documents providing for the accrual and payment of interest, as well as changes to form documents that provide for interest to accrue and be paid at the LIBOR rate if reference is made to administration by the British Banker’s Association (BBA).
Effective as of February 1, 2014, ICE Benchmark Administration Limited (IBA) became the administrator of LIBOR, replacing the BBA. In light of the changes to LIBOR administration, Lenders should amend all form documents and existing agreements that refer to LIBOR as being administered by the BBA to reflect the change of administration to IBA. Immediate changes would not, however, be required if such documents or agreements contain general successor language referring to the LIBOR administrator such as “(or any other Person that takes over administration of such rate)”.
Lenders should also continue to update forms and existing agreements to reflect other changes made to LIBOR in the past year, including the termination of calculation and publication of five currencies and eight maturities. As of mid-2013, the BBA had discontinued calculation of LIBOR for Danish, Swedish, Canadian, Australian and New Zealand currencies and the two-week, four month, five month, seven month, eight month, nine month, ten month and eleven month maturities.
The IBA has indicated that there will be no immediate changes to the calculation of LIBOR at this time, and has been working with the BBA for the past several months to ensure an orderly transition.
The changes come as part of ongoing efforts to restore the credibility of LIBOR in the wake of 2012 allegations of rate manipulation by certain member banks. It also represents the fulfillment of one of the primary recommendations made by the Wheatley Report, the final report of a review of the framework for setting LIBOR commissioned by the United Kingdom Chancellor of the Exchequer following the 2012 scandal.
Among other findings, the Wheatley Report recommended that administration of LIBOR be transferred to a new, independent entity. Accordingly, the Hogg Tendering Advisory Committee for Libor (HTAC) was tasked with submitting a recommendation for the successor administrator to BBA. In July 2013, following the recommendation of HTAC, the BBA selected NYSE Euronext Rate Administration Limited, a subsidiary of NYSE Euronext, to be the next LIBOR administrator. NYSE Euronext was later acquired by Intercontinental Exchange Group, Inc. (ICE), and NYSE Euronext Rate Administration Limited was renamed ICE Benchmark Administration Limited in November 2013.
It is likely that further changes to LIBOR may be forthcoming as additional reforms designed to increase accountability and transparency in its calculation are implemented. Lenders should also ensure that they have adequate ability to monitor such changes and amend their form documents and existing agreements accordingly.
