On 5 March 2021, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, released the much anticipated feedback statement (“Cessation Statement”) reporting the results of its 4 December 2020 Consultation on Potential Cessation. IBA consulted on the issue of LIBOR publication cessation because “a majority of LIBOR panel banks had communicated to IBA that they would not be willing to continue contributing to the relevant LIBOR settings after [the proposed cessation] dates.” Pursuant to the Cessation Statement, IBA intends to cease publication of (i) all GBP, EUR, CHF and JPY LIBOR settings, and the 1 Week and 2 Month USD LIBOR settings immediately following the LIBOR publication on 31 December 2021, and (ii) the Overnight and 1, 3, 6 and 12 Month USD LIBOR settings immediately following the LIBOR publication on 30 June 2023, subject to any rights of the UK Financial Conduct Authority (“FCA”), the regulatory supervisor of IBA, to compel IBA to continue publication using a changed methodology. Individual non-confidential responses to the consultation, of the 55 responses received, can be viewed on the IBA website.

IBA highlighted that FCA has advised, pursuant to a related announcement on future cessation and loss of representativeness of the LIBOR benchmarks (“FCA Announcement”), that it does not intend to use its proposed new powers (included in Financial Services Bill 200 and supplemented by explanatory notes published by HM Treasury in its Policy Statement – Amendments to the Benchmarks Regulation to support LIBOR transition) to compel publication of any EUR or CHF tenors, nor the less common tenors of USD, GBP and JPY LIBORs, beyond the proposed publication cessation dates. FCA stated, however, that it does intend to consult on using those powers to “require IBA to continue the publication on a “synthetic” basis of the 1 Month, 3 Month and 6 Month GBP and JPY LIBOR,” and will consider doing so in the future with respect to those same more common tenors of USD LIBOR. FCA emphasized that publication of LIBOR settings on a synthetic basis “would be intended to assist legacy contract holders” and “new use of synthetic LIBOR by UK regulated firms in regulated financial instruments would be prohibited under the Benchmarks Regulation as amended by the Financial Services Bill….” (emphasis added).

As a result of its assessment of the Cessation Statement in the context of its proposed new powers, FCA advised that publication of 26 of the existing 35 LIBOR tenors will permanently cease as of the cessation dates announced by IBA. The remaining 9 LIBOR tenors (1-, 3-, and 6-month GBP, JPY and USD LIBOR) will “no longer be representative and representativeness will not be restored” as of the cessation dates announced by IBA. IBA notes in the Cessation Statement that FCA has confirmed to it that, based on undertakings from existing panel banks, it does not expect any LIBOR setting to become “unrepresentative” before the applicable intended cessation date.

A number of additional statements and resources also were published on 5 March 2021 in support of the Cessation Statement and FCA Announcement:

  1. Bank of England – Announcements on the end of LIBOR – “Today’s announcements confirm the importance of those preparations [for a smooth transition in advance of LIBOR ceasing] for all users of LIBOR. Regulated firms should expect further engagement from their supervisors at both the Prudential Regulation Authority and the FCA to ensure these timelines are met.”
  2. International Swaps and Derivatives Association (“ISDA”) – ISDA Statement on UK FCA LIBOR Announcement – “Today’s announcement [by the FCA] constitutes an index cessation event under the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol for all 35 LIBOR settings. As a result, the fallback spread adjustment published by Bloomberg is fixed as of the date of the announcement for all euro, sterling, Swiss franc, US dollar and yen LIBOR settings.”
  3. ISDA – Future Cessation and Non-Representativeness Guidance – “The purpose of this Guidance is … to describe how the terms of the ISDA 2020 IBOR Fallbacks Protocol … and Supplement number 70 to the 2006 ISDA Definitions … [as well as the 2018 ISDA Benchmarks Supplement] apply to the FCA LIBOR Announcement,” and includes a Summary Table of relevant dates and information.
  4. Bloomberg – IBOR Fallbacks: Technical Notice – Spread Fixing Event for LIBOR – Setting forth “every LIBOR Tenor, Ticker and associated fixed Spread Adjustment” for the five key LIBOR currencies.
  5. U.S. Alternative Reference Rates Committee – ARRC Commends Decisions Outlining the Definitive Endgame for LIBOR – “We now know when a representative USD LIBOR will end and what its associated spread adjustments will be in no uncertain terms,” and noting that “supervisors will focus on ensuring that firms are managing the remaining transition risks.” The statement acknowledged additional support from the Federal Reserve Board and Commodity Futures Trading Commission.
  6. Structured Finance Association – LIBOR Cessation Dates Officially Announced – the SFA noted that it is “especially pleased with the adoption of an extension for USD LIBOR for legacy contracts – and continues to support a legislative solution allowing time for USD LIBOR transactions executed before January 1, 2022 to mature….”

The Cessation Statement is “a public statement … by … the administrator of [LIBOR] … announcing that such administrator … will cease to provide all Available Tenors of such Benchmark … permanently or indefinitely,”[1] and, as such, constitutes a “Transition Event” or “Cessation Event” under most recommended forms of LIBOR fallback language, including the ISDA 2020 IBOR Fallbacks Protocol published by ISDA. As a result, borrowers and other market participants can expect their lenders and other credit providers to begin to implement applicable fallback provisions.

It is important to understand that the immediate effect of the Cessation Statement will be to set the fallback rate spread adjustment (the 5-year historical median difference between the relevant LIBOR and its applicable fallback rate) but will not result in an immediate move from LIBOR to applicable fallback rates. However, fallbacks that are not in such recommended forms will need to be evaluated to see if the Cessation Statement has the same or substantially similar effect under such fallbacks.

Most global working groups have stated a preference for implementing the spread adjustment methodology set by ISDA in order to avoid basis mismatches between various cash products and the derivatives used to hedge related interest rate risk. According to the IBOR Fallback Rate Adjustments Rule Book jointly published by ISDA and Bloomberg Index Services Limited, which is the organization chosen by ISDA to calculate and publish benchmark fallback adjustments pursuant to a methodology based on industry consultation feedback, the Cessation Statement constitutes a “Spread Adjustment Fixing Date” (a component of which is defined substantially similarly to “Transition Event” or “Cessation Event” under most fallback provisions). The occurrence of the Spread Adjustment Fixing Date fixes the spread adjustment calculation (i.e., the five-year period used to calculate the historical median), but does not cause the related fallback rate to be applied. The application of the relevant fallback rate will not occur until “the first date on which [LIBOR] is no longer provided.”[2] The ARRC has provided helpful guidance on these mechanics in its Guide on the Endgame for USD LIBOR.

Because the “Index Cessation Effective Date” has not occurred yet, transition to alternative rates (e.g., SOFR) is not triggered under hardwired fallback provisions as a result of the Cessation Statement, nor is there generally (depending on the wording of applicable contractual fallback provisions) any immediate obligation for credit providers following the amendment approach to benchmark replacement to propose a new reference rate (although, pursuant to the ARRC’s Best Practices for Completing Transition from LIBOR, anticipated fallback rates should be chosen by the applicable determining party at least “six months prior to reset after LIBOR’s end”). So, for now, recommended practice is that lenders and other credit providers provide notice to their borrowers and other counterparties of the occurrence of the “Transition Event”/“Cessation Event” and resultant “Spread Adjustment Fixing Date” and intensify their efforts to be prepared, contractually and operationally, for the impending transition from LIBOR to replacement rates.

Trade organizations, including the LSTA, have published model language that can be used by market participants to give notice of this trigger event and the effectiveness of contractual fallback provisions.

Please contact your Mayer Brown Finance lawyer for assistance in implementing your IBOR fallbacks protocol.

[1] From the definition of “Benchmark Transition Event” set forth in ARRC Recommendations Regarding More Robust Fallback Language for New Originations of LIBOR Syndicated Loans (Alternative Reference Rates Committee, 30 June 2020)

[2] See definition of “Index Cessation Effective Date” under Supplement No 70 to the 2006 ISDA Definitions for legacy contracts and “Fallback Index Cessation Effective Date” under the ISDA Protocol for new originations.

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