February 1, 2021 - Now that the ICE Benchmark Administration (“IBA”)’s consultation on their intentions on LIBOR cessation has closed, the IBA’s announcement, which would make the timeline for cessation set forth in the consultation official and set the spread adjustment for any LIBOR currency-tenor setting addressed in the announcement, can be expected any day. The FCA’s Edwin Schooling Latter made clear in his speech last week that market participants should not expect a long gap between the close of the consultation and the IBA’s feedback statement: “[W]e see no case for delaying decisions or announcements beyond the time necessary properly to assess the consultation responses that have now been received.” Risk.net further reported that participants at the same conference were advised that they should be prepared for such an announcement any day.
In his speech, Schooling Latter provided interesting color on the interplay of announcements as well. While making it clear that he could not prejudge or precisely provide the contents of the announcements, it is the best information we have on some scenarios to keep in mind:
- Scenario 1: “If IBA confirms to the FCA that following its consultation it intends to cease LIBOR settings, and the FCA is satisfied that the benchmark can be ceased in an orderly fashion, and the FCA confirms a policy that would not envisage compelling continued production on a changed methodology basis of a relevant setting, then we could announce that these settings will cease.”
- This would be a trigger event under ARRC fallback language although the transition away from LIBOR would not occur until the cessation date. Note that the announcement of cessation might be made by the IBA or the FCA but either case would be a trigger event under ARRC fallback language.
- Scenario 2: “Another possibility for some settings is that it is clear the panel will end, but [the FCA does] envisage consulting on requiring continued publication on a synthetic basis under proposed new powers set out in the Financial Services Bill, or are continuing to assess whether to do so. In that case, it would be clear that the rate will no longer be representative beyond the relevant panel end date. The only way it could continue would be on an unrepresentative, synthetic basis. For these settings we could make a so-called ‘pre-cessation announcement’ in terms of ISDA documentation.
- This would not be a trigger event under ARRC fallback language because the pre-cessation trigger does not cover a prospective statement by the FCA that LIBOR will no longer be representative as of a future date.
Schooling Latter further noted that “whether the relevant currency-tenor setting is subject to a cessation announcement, a pre-cessation announcement, or indeed both, announcements covering all settings could be made on the same day.”
Those scenarios were also identified in our previous post where we noted that market participants should be reviewing fallback language in their existing agreements to understand whether these expected announcements are trigger events under that language. If so, it is necessary to further understand what actions come next and by whom. For instance, ARRC language requires that the administrative agent or sole lender notifies the transaction parties that a trigger event has occurred. Click here for a short video on how market participants should prepare today.
Bottom line: Reading the tea leaves, prepare for a “big bang” day where all relevant announcements are made across the LIBOR currency-tenor settings and the related spread adjustments are fixed.
For more information, please contact Tess Virmani.