IBA and FCA Announce Cessation of LIBOR Settings

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.

© 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.