March 5, 2021 marks an important day in the LIBOR transition process as the ICE Benchmark Administration (IBA), UK Financial Conduct Authority (FCA) and ISDA made important announcements on the cessation of LIBOR. In recent years the Bank of England and the FCA have made it clear that the lack of an active underlying market makes LIBOR unsustainable and unsuitable for widespread use. As a result, the Bank of England and FCA have worked closely with market participants and other regulatory authorities to ensure alternatives to LIBOR are available and that existing contracts can be transitioned onto these alternatives to safeguard financial stability and market integrity.
With today’s announcements by the IBA, FCA and ISDA, the timeline for the cessation of LIBOR has been fixed.
The IBA (the administrator of LIBOR) published a feedback statement on its consultation on the cessation of its publication of LIBOR (see our previous blog). The IBA confirmed that the majority LIBOR panel banks indicated that they would not be willing to continue contributing to the relevant LIBOR in future and, as a result, the IBA notified the FCA that it will cease publishing the LIBOR rates on the dates set out below.
Following the statement by the IBA, the FCA confirmed that all LIBOR settings will cease to be provided by any administrator or no longer be representative after:
- December 31, 2021, in the case of all sterling, euro, Swiss franc and Japanese yen settings, and the 1-week and 2-month US dollar settings; and
- June 30, 2023, in the case of the remaining US dollar settings.
While publication of the LIBOR settings will cease immediately on the dates set out above, the FCA does not expect that any LIBOR settings will become unrepresentative before these dates.
The FCA’s announcement highlights the importance of market participants’ preparations to ensure a smooth transition from LIBOR. The FCA warns that regulated firms should expect more engagement from their supervisors to ensure that the timelines set by the relevant working groups and sector bodies are met. Nikhil Rathi (FCA CEO) stressed that “Market participants must now complete their transition plans.”
The FCA recognizes that there are ‘tough legacy’ contracts that may be difficult to amend in time and will consult in Q2 on using the proposed new powers that the UK government is legislating to grant to the FCA to require continued publication of some sterling LIBOR settings on a ‘synthetic’ basis (as discussed in our previous blog). The FCA will also consult in Q2 on which legacy contracts will be permitted to use such a ‘synthetic’ LIBOR rate.
In response to the FCA’s announcement, ISDA confirmed that the announcement constitutes an index cessation event under the ISDA IBOR Fallbacks Supplement (the Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (the Protocol) for all 35 LIBOR settings.
For derivatives that incorporate the Supplement or are subject to adherence of the Protocol, the fallbacks to risk-free rates will automatically occur on the dates set out above for the relevant LIBOR settings. However, the fallback spread adjustment published by Bloomberg will be fixed as of March 5, 2021 for all euro, sterling, Swiss franc, US dollar and yen LIBOR settings.
‘Today’s announcements mark the final chapter in the process that began in 2017, to remove reliance on unsustainable LIBOR rates and build a more robust foundation for the financial system. With limited time remaining, my message to firms is clear – act now and complete your transition by the end of 2021’ says Bank of England Governor Andrew Bailey. Market participants are urged to continue to take the necessary action to ensure they are ready for the end of LIBOR.