In a potentially major development, on November 30th ICE Benchmark Administration ("IBA"), the administrator for LIBOR, announced plans to consult early this December on its intention to cease publication (i) immediately after December 31, 2021 of one week and two month USD LIBOR settings and (ii) immediately following the LIBOR publication on June 30, 2023 of the remaining USD LIBOR settings i.e., overnight and one, three, six and twelve month settings.1 According to IBA's regulator, the U.K. Financial Conduct Authority (the "FCA"), this extension of a clear end date for most USD LIBOR settings from the end of 2021 to mid-2023 will continue to incentivize the "swift transition" away from USD LIBOR while still affording market participants sufficient time to address the corresponding modifications that must be made to legacy contracts referencing USD LIBOR.2
IBA announced on November 18, 2020, that it would be consulting on its intention to cease publication of GBP, EUR, CHF and JPY LIBOR settings after December 31, 2021.3 This potential extension of rate settings beyond that date with respect only to specified USD LIBOR settings is, therefore, most likely a significant indicator of the perceived difficulty confronting market participants in their efforts to transition away from USD LIBOR. (Note that the November 30 announcements from the IBA, FCA and U.S. bank regulators alone are insufficient to trigger fallbacks under certain of the International Swaps and Derivatives Association, Inc.'s benchmark reform-related supplements and protocols.4)
As we previously noted, some commentators had suggested that the November 18, 2020, announcement indicated that official sector and panel bank discussions on the USD LIBOR transition were lagging behind those regarding LIBOR rates for other major currencies and that, therefore, the transition from
USD LIBOR to a widely-accepted replacement rate most likely the Secured Overnight Financing Rate (SOFR) might get pushed out beyond December 31, 2021, which is the date after which panel banks could no longer be compelled to make USD LIBOR submissions. Nevertheless, regulators and industry groups continue to emphasize the need to implement the necessary contractual changes as quickly as possible. Consider, for example, the following warning from the U.S. Federal Financial Institutions Examination Council (the "FFIEC"): "Failure to prepare for disruptions to USD LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks' safety and soundness."5 Consistent with the FFIEC's view, the Alternative Reference Rates Committee had noted approvingly that the concurrent announcements yesterday by IBA, the FCA and U.S. regulators "include supervisory guidance encouraging banks to stop new USD LIBOR issuances by the end of 2021."6 Moreover, significant questions had previously arisen regarding the willingness of swap dealers to enter into new USD LIBOR exposures in the near future, though market reaction to the announcement of the potential USD LIBOR extension remains to be seen.
We will continue to monitor and report on developments in this area.