June 30, 2020 - Last week, there were several potentially confusing communiques from the FCA and UK Treasury that some folks read to suggest either i) LIBOR may end this year or ii) LIBOR might continue well past December 2021. Actually, neither interpretation is correct. Bottom line: We’re still working off a potential December 2021 end date for LIBOR.
In a Risk.net webcast, Edwin Schooling-Latter, the UK Financial Conduct Authority’s (“FCA”) head of markets and wholesale policy, observed that LIBOR will continue through end-2021. However, in November or December of 2020, the FCA could make an announcement about the discontinuation of LIBOR after end-2021. This announcement of LIBOR cessation – even though LIBOR has not ceased – would trigger the calculation of the spread adjustment under ISDA’s and the ARRC’s LIBOR fallback language. As a completely hypothetical example, if the FCA announced on December 21, 2020 that LIBOR would cease on December 31, 2021, then the spread adjustments for derivatives contracts and loans falling back from LIBOR to SOFR would be fixed on December 21, 2020. Likewise, in March the FCA said they could announce, well-prior to December 2021, that LIBOR would be non-representative after end-2021. In either case, such an announcement would give the market more time to prepare for LIBOR cessation.
The next point of confusion last week was the announcement by the UK Treasury and the FCA that they would support legislation to give the FCA power to strengthen and amend the LIBOR methodology to allow it to be used longer for “tough legacy” contracts. These are contracts that cannot transition from LIBOR because they have inappropriate (or no) alternatives and no ability to be amended. To be clear, at that point, LIBOR would be non-representative – so it could not be used in new contracts – and its application would only be to contracts that have no ability to transition away from LIBOR. The UK Government looks to take these measures forward in a forthcoming Financial Services Bill. Ultimately, despite the sound and fury, the UK government and regulators i) did not say LIBOR would end in 2020 and ii) nor did they say that LIBOR could be extended for contracts willy nilly. The measured – but accelerating – LIBOR transition process continues.
