Homestretch to December 31, 2021, and the end of LIBOR? Not so fast.

All the relevant regulators and other authorities clearly indicated for some time that USD LIBOR would no longer be available after December 31, 2021, and that neither the COVID crisis nor other factors would delay the transition from LIBOR to other benchmarks. However, a November 30, 2020, announcement by LIBOR’s administrator, the ICE Benchmark Administration (IBA), signaled to the market that USD LIBOR for the most liquid maturities is now likely to continue to be published until June 30, 2023. IBA announced that it would “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 [overnight and one, three, six and 12 month USD LIBOR settings] immediately following the LIBOR publication on June 30, 2023.”

LIBOR’s regulator, as well as the U.S. banking regulators and ISDA, issued statements in support of the IBA statement, and, in order to facilitate an orderly—and safe and sound— LIBOR transition, the U.S. banking regulators also encouraged 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. The ARRC had previously recommended that new LIBOR loan originations should end by June 30, 2021, which may be thought to be “as soon as practical.”

The banking regulators also noted that “[n]ew contracts entered into before December 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 ARRC had also previously recommended that loans start using hardwired fallbacks by September 30, 2020. For lenders and borrowers who insist on continuing to use LIBOR, a hardwired fallback approach could avoid the need to amend large numbers of contracts as the LIBOR end approaches. In addition, on October 23, 2020, ISDA published its long-awaited IBOR Fallbacks Protocol, which enables adherents to amend their legacy derivatives contracts, on a multilateral basis with other adherents, to include market-standard fallbacks. This Protocol remains open to adherence and is scheduled to become effective on January 25, 2021.

If the scheduled unavailability for most USD settings of LIBOR is delayed until June 30, 2023, as now expected (and to be confirmed after the end of IBA’s consultation), the delay would allow time for most legacy contracts to mature before USD LIBOR is no longer available, and would also allow for more time for “term” SOFR to develop. In addition, legislation to address legacy contract issues remains relevant for contracts maturing after LIBOR is no longer available, whenever that may be. Legislation in the State of New York for contracts governed by New York law remains under consideration and similar U.S. federal legislation, which would have broader applicability, also remains a possibility. Such legislation would be useful to resolve many, although not all, legacy contract issues. Borrowers and lenders must continue to diligence their legacy contracts in order to evaluate their exposure and to make choices. The “bottom line”, as expressed by the LSTA: “The November 30, 2020 announcements do give markets time to get their legacy portfolios in order and do reduce the likelihood of a disorderly LIBOR transition. The announcements do not give a reason to delay the work that has been undertaken or to postpone well-considered timelines.”

Important Sources

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

FCA response to IBA’s proposed consultation on intention to cease US$ LIBOR

Board of Governors of the Federal Reserve System/ Federal Deposit Insurance Corporation/ Office of the Comptroller of the Currency - Statement on LIBOR transition

ISDA Statement on IBA and UK FCA Announcements on LIBOR Consultations

ARRC Applauds Major Milestone in Transition from U.S. Dollar LIBOR

Proposed Path Outlines a Clear End Date for USD LIBOR; Would End New Issuances by End-2021, and Subject to Consultation Outcomes, Legacy Contracts Could Mature by Mid-2023

Alternative Reference Rates Committee (ARRC) - Minutes for the December 9, 2020 Meeting

LSTA: LIBOR’S END: ARE ARRC RECOMMENDATIONS ALIGNED WITH FCA & IBA ANNOUNCEMENTS?

Orrick LIBOR Alerts