News
March 15, 2021

IBA and FCA Announce Cessation of LIBOR Settings

Advisory

General

On March 5, 2021, ICE Benchmark Administration Limited (IBA), the administrator for LIBOR, announced1  that it will permanently cease to publish LIBOR beginning on the following dates (the Cessation Effective Dates):

  • January 1, 2022 for:
    • all seven EUR LIBOR settings
    • all seven CHF LIBOR settings
    • all seven JPY LIBOR settings
    • all seven GPB LIBOR settings
    • one-week and two-month USD LIBOR settings
  • July 1, 2023 for the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings

No successor administrator was identified in the IBA announcement.

The IBA's regulator, the UK's Financial Conduct Authority (FCA), promptly confirmed the IBA's announced timetable in its own separate announcement2 on the same date. The FCA also indicated that it will consult with the IBA regarding the continued publication, beginning on the respective Cessation Effective Dates, of the following nine LIBOR settings on a non-representative, synthetic basis:3

  • one-month, three-month and six-month GPB LIBOR settings for an undefined period
  • one-month, three-month and six-month JPY LIBOR settings for one additional year
  • one-month, three-month and six-month USD LIBOR settings for an undefined period

Notwithstanding the potential continuation of publication of these nine LIBOR settings, the FCA announcement made clear that these LIBOR settings will "no longer be representative of the underlying market and economic reality" after the respective Cessation Effective Dates and included an express acknowledgement that fallback provisions contained in contracts that reference the affected LIBOR settings would be triggered, as further detailed below.

Effect of Announcement

The IBA's and FCA's announcements affect (i) derivatives documentation between parties that have adhered to the ISDA 2020 IBOR Fallbacks Protocol (or that have bilaterally agreed to the IBOR Fallbacks Supplement) (collectively, the ISDA Fallback Language) and that reference one or more of the 35 affected LIBOR settings, and (ii) floating rate notes, securitization documentation, bilateral business loan agreements and syndicated loan agreements (collectively, loan agreements 4) that incorporate the contractual USD LIBOR fallback provisions recommended by the Alternative Reference Rates Committee (ARRC) in the United States (the ARRC Fallback Language).5 

Derivatives Incorporating ISDA Fallbacks

The FCA announcement constitutes an Index Cessation Event (as defined in the ISDA Fallback Language) with respect to all 35 affected LIBOR settings effective as of March 5, 2021. Such an Index Cessation Event does not, however, mean that the new fallback rates (i.e., Fallback Rates as defined in the ISDA Fallback Language) will apply immediately to those derivatives transactions that utilize the ISDA Fallback Language (unless otherwise provided in the relevant derivatives documentation). Rather, the Fallback Rates will begin to apply on the applicable Index Cessation Effective Dates, which are as follows:

  • January 1, 2022 for:
    • all seven EUR LIBOR settings
    • all seven CHF LIBOR settings
    • all seven JPY LIBOR settings
    • all seven GPB LIBOR settings
  • July 1, 2023 for all seven USD LIBOR settings

Note that the Index Cessation Effective Date for the one-week and two-month settings of USD LIBOR (i.e., July 1, 2023) is different than the date on which such settings will permanently cease to be published (i.e., January 1, 2022). For these two settings only, linear interpolation based on the longer and shorter tenors (which will continue to be published before July 1, 2023) will be used to determine those settings from January 1, 2022 through June 30, 2023. Once linear interpolation is no longer possible for those settings (i.e., commencing on July 1, 2023), an Index Cessation Effective Date will be deemed to have occurred with respect to those settings.

On the other hand, loan agreements that incorporate the ARRC Fallback Language do not provide for such linear interpolation for the one-week and two-month USD LIBOR settings for the period beginning January 1, 2022 through June 30, 2023; instead, as described below, loan agreements that provide one-week or two-month USD LIBOR options only will transition to the new fallback rates (i.e., the "Benchmark Replacement" as defined in the ARRC Fallback Language) on January 1, 2022. As a result, this is an area of potential divergence between these loans and the associated derivatives, as a loan agreement that references one-week or two-month USD LIBOR settings that has transitioned to a Benchmark Replacement may have a rate that is different from the interpolated rate referenced in its associated derivatives until the new Fallback Rates apply on July 1, 2023.6 

Loan Agreements Incorporating ARRC Fallbacks

For loan agreements that incorporate the ARRC Fallback Language, the ARRC has confirmed that the IBA's and FCA's announcements constitute a Benchmark Transition Event (as defined in the ARRC Fallback Language) for all USD LIBOR settings. This does not, however, mean that the applicable Benchmark Replacement will begin to apply immediately to such loan agreements (unless otherwise provided in such agreements). Rather, the transition to a Benchmark Replacement will occur on the date on which all Available Tenors (as defined in the ARRC Fallback Language) under the loan agreement permanently and indefinitely cease to be published. Accordingly, the applicable Benchmark Replacement Dates (as defined in the ARRC Fallback Language) will be:

  • January 1, 2022 for loan agreements that provide one-week and two-month USD LIBOR options only
  • July 1, 2023 for loan agreements that provide any of following USD LIBOR options: overnight, one-month, three-month, six-month and 12-month USD LIBOR

Lenders (for bilateral loans) and administrative agents (for syndicated loans) under loan agreements that incorporate the ARRC Fallback Language will need to promptly notify the borrower that the a Benchmark Transition Event has occurred and the applicable Benchmark Replacement Date.

Fixing of Spread Adjustment

Bloomberg Index Services Limited (BISL) currently publishes "indicative" spreads for each LIBOR setting for informational purposes. Under the ISDA Fallback Language, the spread for a specific LIBOR setting becomes "fixed" upon the earlier to occur of (i) an Index Cessation Event or (ii) a public statement or publication of information constituting, in effect, an Index Cessation Event under circumstances where linear interpolation is no longer possible. As noted above, the FCA announcement constitutes an Index Cessation Event for all 35 LIBOR settings addressed by the announcement with an effective date of March 5, 2021. BISL has confirmed this conclusion and, accordingly, March 5, 2021 has been designated as the Spread Adjustment Fixing Date (as defined in the ISDA Fallback Language) for each LIBOR setting.7

For loan agreements that incorporate the ARRC Fallback Language, the spread adjustment (i.e., Benchmark Replacement Adjustment as defined in the ARRC Fallback Language) is determined according to the following hierarchy:

  • the spread adjustment selected or recommended by the ARRC, then
  • the spread adjustment selected or recommended by ISDA

The ARRC has stated that its recommended spread adjustments for non-consumer cash products that reference USD LIBOR will be the same as the spread adjustments applicable to USD LIBOR under the ISDA Fallback Language. Accordingly, the spread adjustments for USD LIBOR settings that were set (or fixed) by BISL on March 5, 2021 will apply to loan agreements that incorporate the ARRC Fallback Language.

We set forth below a table of such fixed spread adjustments set by BISL.

 LIBOR Tenor  Ticker   Spread Adjustment (%)
       
 CHF  Spot/Next  SSF00SN Index  -0.0551
 CHF  1 Week  SSF001W Index  -0.0705
 CHF  1 Month  SSF001M Index  -0.0571
 CHF  2 Months  SSF002M Index  -0.0231
 CHF  3 Months  SSF003M Index  0.0031
 CHF  6 Months  SSF006M Index  0.0741
 CHF  12 Months  SSF0012M Index  0.2048
 EUR  Overnight  SEE00ON Index  0.0017
 EUR  1 Week  SEE0001W Index  0.0243
 EUR  1 Month  SEE0001M Index  0.0456
 EUR  2 Month  SEE0002M Index  0.0753
 EUR  3 Month  SEE0003M Index  0.0962
 EUR  6 Month  SEE0006M Index  0.1537
 EUR  12 Month  SEE0012M Index  0.2993
 GBP  Overnight  SBP00ON Index  -0.0024
 GBP  1 Week  SBP0001W Index  0.0168
 GBP  1 Month  SBP0001M Index  0.0326
 GBP  2 Month  SBP0002M Index  0.0633
 GBP  3 Month  SBP0003M Index  0.1193
 GBP  6 Month  SBP0006M Index  0.2766
 GBP  12 Month  SBP0012M Index  0.4644
 JPY  Spot/Next  SJY00SN Index  -0.01839
 JPY  1 Week  SJY0001W Index  -0.01981
 JPY  1 Month  SJY0001M Index  -0.02923
 JPY  2 Month  SJY0002M Index  -0.00449
 JPY  3 Month  SJY0003M Index  0.00835
 JPY  6 Month  SJY0006M Index  0.05809
 JPY  12 Month  SJY0012M Index  0.16600
 USD  Overnight  SUS00ON Index  0.00644
 USD  1 Week  SUS0001W Index  0.03839
 USD  1 Month  SUS0001M Index  0.11448
 USD  2 Month  SUS0002M Index  0.18456
 USD  3 Month  SUS0003M Index  0.26161
 USD  6 Month  SUS0006M Index  0.42826
 USD  12 Month  SUS0012M Index  0.71513
 

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. The IBA announcement can be found here.

  2. The FCA announcement can be found here.

  3. The continued publication of these nine LIBOR settings would be an exercise of certain new powers that would be granted to the FCA under a proposed Financial Services Bill that is being considered by the UK Parliament. It is, therefore, subject to enactment of the Financial Services Bill.

  4. For the avoidance of doubt, the term "loan agreements" does not include any agreements relating to loans made to consumer borrowers.

  5. This Advisory is based on the "hardwired" ARRC Fallback Language.  The precise effect of the IBA's and FCA's announcements will be different for loan agreements that incorporate material modifications to the ARRC Fallback Language or fallback language based on the ARRC's "amendment" approach.

  6. We note that the ISDA Fallback Language contemplates the use of compounded Fallback Rates set in arrears.  In the case of derivatives that reference USD LIBOR, the Fallback Rate would be compounded SOFR in arrears.  In our experience, many loan market participants have adopted the ARRC Fallback Language which contemplates the use of Term SOFR or, if that is not available, Daily Simple SOFR, rather than compounded SOFR in arrears.  This is another potential area of divergence between loan agreements that incorporate the ARRC Fallback Language and derivatives that incorporate the ISDA Fallback Language.

  7.  BISL issued a Technical Notice regarding the fixing of the spread adjustment for the 35 LIBOR settings addressed in the FCA announcement.  The Technical Notice can be found here.

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