Libor Administrator Proposes Extending Timeline for Discontinuing Some U.S. Dollar Benchmarks

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  • The Intercontinental Exchange (ICE) Benchmark Administration (IBA), which is the administrator of the London Interbank Offered Rate (Libor), announced on Nov. 30, 2020, that it will consult in early December on its intention to cease the publication of the one-week and two-month U.S. dollar (USD) Libor settings immediately following the Libor publication on Dec. 31, 2021, and the remaining USD Libor settings immediately following the Libor publication on June 30, 2023.
  • The new proposal is significantly longer than the timeline that had been previously contemplated for the discontinuation of the widely used one-month, three-month and other USD Libor benchmarks.
  • In response to the IBA's announcement, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a statement encouraging banks to transition away from the USD Libor as soon as practicable and in any event by Dec. 31, 2021.

The Intercontinental Exchange (ICE) Benchmark Administration (IBA), which is the administrator of the London Interbank Offered Rate (Libor), announced on Nov. 30, 2020, that it will consult in early December on its intention to cease the publication of the one-week and two-month U.S. dollar (USD) Libor settings immediately following the Libor publication on Dec. 31, 2021, and the remaining USD Libor settings immediately following the Libor publication on June 30, 2023.

The new proposal is significantly longer than the timeline that had been previously contemplated for the discontinuation of the widely used one-month, three-month and other USD Libor benchmarks. The IBA and the Financial Conduct Authority (FCA), the relevant United Kingdom (U.K.) regulator, indicated that the panel banks will continue to provide the necessary quotations in order to produce those Libor rates through June 30, 2023.

In response to the IBA's announcement, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued a statement encouraging banks to transition away from the USD Libor as soon as practicable. In a relevant part, the statement reads:

"Extending the publication of certain USD Libor tenors until June 30, 2023 would allow most legacy USD Libor contracts to mature before Libor experiences disruptions. Failure to prepare for disruptions to USD Libor, including operating with insufficiently robust fallback language, could undermine financial stability and banks' safety and soundness.

"Given consumer protection, litigation, and reputation risks, the agencies believe entering into new contracts that use USD Libor as a reference rate after Dec. 31, 2021, would create safety and soundness risks and will examine bank practices accordingly. Therefore, the agencies 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 Dec. 31, 2021. New contracts entered into before Dec. 31, 2021 should either utilize a reference rate other than Libor or have robust fallback language that includes a clearly defined alternative reference rate after Libor's discontinuation."

The statement includes a number of circumstances under which it might be appropriate to enter into new USD Libor transactions after Dec. 31, 2021, including: 1) transactions executed for purposes of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD Libor exposure; 2) market making in support of client activity related to USD Libor transactions executed before Jan. 1, 2022; 3) transactions that reduce or hedge the bank's or any client of the bank's USD Libor exposure on contracts entered into before Jan. 1, 2022; and 4) novations of USD Libor transactions executed before Jan. 1, 2022.

The joint statement also makes clear that the IBA's announcement should not be read as announcing that the Libor benchmark has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative for the purposes of language adopted by the International Swaps and Derivatives Association.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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