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In the world of LIBOR transition, the ICE Benchmark Administration Limited’s (IBA) 30 November announcement that it intends for most USD LIBOR tenors to continue significantly beyond the end-2021 deadline was nothing short of a bombshell. Many in the industry had long argued that the transition deadlines were too short and not enough progress had been made in building an infrastructure based on alternative risk-free rates (RFRs) to ensure a smooth transition by January 2022. Nevertheless, regulators insisted that the deadline had to be met and would not be moved, not even in light of the significant disruption caused by COVID-19.
The planned extension of the life of most USD LIBOR’s until June 2023—an additional 18 months—is a significant event in global efforts to replace the rate. In the meantime, the IBA and FCA issued further statements providing additional clarity about the fate of the other LIBOR rates published in four currencies. In this article, we summarise these statements and set out what appear to be the diverging fates of the five remaining LIBOR rates.
Ever since the FCA’s July 2017 statement that it no longer intended to persuade or compel banks to submit to LIBOR after 31 December 2021, the industry has been working on the transition away from LIBOR. LIBOR currently is published in U.S. dollar, pound sterling, euro, Swiss franc and Japanese yen and for each of these, individual RFRs have been identified as replacements.
Transition efforts are under way but the rate of adoption and the issuance of new products referenced to replacement RFRs varies widely across the five currencies. Nevertheless, until the 30 November statement by the IBA, it had been expected that publication of all LIBOR currencies would cease on or shortly after 31 December 2021. Subject to the outcome of the IBA’s consultation, this expectation has been largely confirmed.
The only exception to this was going to be tough legacy contracts—financial instruments which would be nearly impossible to transition to the respective RFR, for example because it would require the consent of a large group of anonymous investors. To help the industry deal with these contracts, the FCA was granted power to force the ongoing publication of a synthetic LIBOR, i.e. one that is not based on submission from panel banks.
In its consultation paper from 18 November, the FCA clarified that it only expects to use its powers for benchmarks where there is a sizeable number of tough legacy contracts and its intervention is needed to protect consumers or market integrity.
Interestingly, the FCA also notes that it would not use its powers if there are insufficient inputs—in the absence of contributions from panel banks—to produce a synthetic rate. For LIBOR, the FCA refers to the methodology developed under the leadership of ISDA and notes that “wide support has already been established.” Therefore, it would seem likely that the regulator would mandate this approach to produce a synthetic LIBOR rate.
In its statement, the FCA goes even further and provides clear indications for which LIBOR rates it is most likely to use its powers. Based on this, we can make some predictions on the fates of the remaining LIBOR rates.
Swiss Franc and Euro – No Publication Beyond 2021
Following the end of its consultation and assuming that no substantial concerns are raised, the IBA will likely make a public statement that it will cease the publication of Swiss franc and euro LIBOR by 31 December. This is expected to qualify as a pre-cessation event, triggering fall-back protocols.
The FCA stated that it is unlikely to use its powers to force the publication of a synthetic rate for both LIBOR rates. Therefore, Swiss franc and euro LIBOR will likely cease to exist by the end of next year.
Yen – Possible Publication Beyond 2021
Similar to Swiss franc and euro LIBOR, the IBA will likely make a statement announcing that yen LIBOR will be discontinued by the end of 2021. However, the FCA noted on 18 November that it will “continue to assess whether it might be necessary and feasible to use the proposed powers in the case of more heavily used yen settings as transition progresses.” Therefore, there may be yen LIBOR tenors which will continue for some time after 31 December 2021.
Sterling – Likely Publication Beyond 2021
While ISDA publications show that the rate of adoption of SONIA as the new reference rate for sterling products is advancing well, on 18 November the FCA noted that “tough legacy contracts exist in significant amounts.” Therefore, the FCA says it “would seem likely” that it will use its powers to create a synthetic sterling LIBOR for the most heavily used tenors. Thus, sterling LIBOR appears likely to continue in some form beyond 2021.
U.S. Dollar – Publication Until End of June 2023
Lastly, and most significantly, most tenors of U.S. dollar LIBOR will continue to be published and based on submissions by contributor banks and therefore remain representative until June 2023. A statement of pre-cessation is not expected for this rate for some time.
Clearly, in contrast to initial plans, authorities appear to have concluded that the stock of tough legacy contracts linked to U.S. dollar LIBOR is so significant that it warrants the publication extension of most rate tenors for 18 months to allow these contracts to expire naturally. Therefore, the FCA will not be using its powers to force the publication of a synthetic rate, at least for the time between 31 December 2021 and 30 June 2023.
However, the FCA is considering separate new powers to ban the issuance of new products linked to U.S. dollar LIBOR for this period, unless they can be shown to be necessary—presumably to manage down the stock of tough legacy contracts.
The statements by the IBA and the FCA allow market participants to understand the likely key dates and milestones for the remaining LIBOR rates.
Following the end of its consultation, in the first half of 2021, the IBA will issue statements of its intention to cease publication of euro, Swiss franc, yen and sterling LIBOR rates. This will likely trigger a pre-cessation event, activating ISDA fallback protocols and automating a large part of the transition to the respective RFRs for each of these currencies.
By 1 January 2022, euro and Swiss franc LIBOR rates will have ceased entirely. The FCA may have mandated the continued publication of some highly active yen and sterling LIBOR tenors, but regulators will be policing their use to ensure that they are only referenced in tough-legacy contracts.
Most U.S. dollar LIBOR tenors will be published until June 2023. However, the authorities will police their use and will seek to restrict it to tough legacy contracts and products necessary to risk manage such positions. Truly new issuance of instruments referencing U.S. dollar LIBOR is expected to cease by the end of 2021 at the latest.
For many firms with multicurrency exposures, the timing of the transition to the new RFRs will need even more careful consideration in order not to create hedging or funding mismatches and the consequent impact on risk and financial reporting. This will be particularly true for portfolios holding multicurrency instruments such as cross currency swaps or loan facilities referencing multiple LIBORs are to be transitioned.
Therefore, while the announcements regarding the potential use of synthetic rates and the continuation of most U.S. dollar LIBOR tenors might suggest a relaxation of the timelines, the transition is continuing at pace and is likely to accelerate as soon as pre-cessation announcements have been made. Firms are well-advised to actively consider the implications of these milestones for their portfolio, their clients and their risk-management strategies.
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