The coming end of LIBOR

12 March 2021

Long trailed and now confirmed: the FCA has announced the future cessation or loss of representativeness of all LIBOR currency-tenor settings on the previously indicated timeline. That is:

  • Immediately after publication on 31 December 2021: GBP LIBOR, EUR LIBOR, CHF LIBOR, JPY LIBOR and 1 week and 2 month USD LIBOR (subject to consultation on 1, 3 and 6 month GBP LIBOR and JPY LIBOR continuing on a 'synthetic' basis for limited use).
  • Immediately after publication on 30 June 2023: the remaining USD tenor settings (subject to consultation on 1, 3 and 6 month USD LIBOR continuing on a 'synthetic' basis for limited use).

A few key implications of the announcement:

  • The credit adjustment spread (CAS) published by Bloomberg using the ‘ISDA methodology’ (five-year historical median difference between the relevant LIBOR and replacement Risk-free Rate (RFR) compounded in arrears) is, for the purposes of ISDA’s fallbacks for LIBOR-referencing derivatives, fixed as of 5 March for each LIBOR currency-tenor setting. 
  • Where incorporated, these fixed spreads will also be relevant to the hard-wired 'switch' or 'fallback' of LIBOR-based loan facilities to an RFR basis - which, for those facilities using the LMA's rate switch mechanics, will likely occur immediately after LIBOR publication on 31 December 2021, unless an earlier switch date has been agreed.
  • Whether and how these fixed spreads become relevant to the 'active conversion' of other LIBOR-based loans (and other cash products), and the pricing of new RFR-based products, will be closely observed. 
  • For LIBOR-based loan facilities which are reliant on an amendment (rather than a hard-wired switch or fallback): the announcement may constitute a “Screen Rate Replacement Event” for the purposes of a ‘Replacement of Screen Rate’ clause based on the LMA’s recommended form – triggering the lower, often “Majority Lender”, threshold for lender consent to amendments which relate to replacing relevant LIBOR currency-tenor settings.

The Bank of England and the FCA have issued a joint statement confirming the importance of LIBOR transition preparations and urging market participants to continue to take the necessary action to ensure they are ready in advance of LIBOR ceasing to be provided on its current basis.  UK regulated firms should expect further engagement from their supervisors at both the PRA and the FCA to ensure these timelines are met.

We at Macfarlanes recently hosted representatives of the FCA and Bloomberg to discuss how asset managers can ensure a successful transition from LIBOR.  Our polling of attendees suggests that much remains to be done.  This landmark announcement from the FCA crystallises the timeline to which firms must work - there will be no reprieve for LIBOR.