This month, the UK Financial Conduct Authority formally authorised ICE Benchmark Administration Limited (IBA) to assume responsibility for the administration of the London Interbank Offered Rate (LIBOR).

IBA is a subsidiary of the Intercontinental Exchange Group, a leading global network of exchanges and clearing houses that administers other benchmarks such as the French CAC40 and the Dutch AEX.

Guided by the Wheatley Review

The authorisation of IBA to administer LIBOR reflects one of the key recommendations of the Wheatley Review.  The review was published in late 2012 following allegations that a number of major financial institutions had been involved in the manipulation of the benchmark.  Click here to find out more.

IBA, as the regulated entity, will have the ultimate responsibility for all aspects of governance and administration relating to LIBOR.  However, as recommended by the Wheatley Review, it will convene an oversight committee that will take responsibility for many decision-making and technical matters.  This committee is expected to comprise benchmark submitters and users, as well as other experts, to ensure that a wide pool of stakeholders takes responsibility for LIBOR’s transparency and credibility.

The Impact on Financial Contracts

This change in the administration of LIBOR may impact financial contracts that reference LIBOR as a benchmark.

Post-Wheatley Review Financial Contracts:

Many financial contracts entered into following the publication of the Wheatley Review already contemplate the replacement of the British Bankers’ Association as the administrator for LIBOR – in these cases, there should be minimal risk of confusion created by the change of administrator or label for LIBOR.

Pre-Wheatley Review Financial Contracts:

The definition of LIBOR in older financial contracts, however, will need to be construed on a case by case basis.

Helpfully, the Loan Market Association (LMA) has obtained an opinion confirming that, for LIBOR definitions that followed the definition in the LMA recommended form primary documentation, an English court would interpret a reference to “BBA LIBOR” as a reference to the renamed LIBOR administered by IBA. This will no doubt provide considerable comfort to banks and borrowers that continue to have outstanding debts based on such loan agreements.