1 December 2020 William Liu  -  Hwang Hwa Sim  -  Michael Ng  -  Terence Lau  -  Gloria Cheung  -  Sherry (Jiwei) Cui  -  Hanwen Yu  - Karen Cheng -  Jonathan Horan  -  Amit Singh  -  Grace Wee  -  Peter Frost Banking - Capital Markets - Debt

ICE Benchmark Administration to consult on its intention to cease publication of USD LIBOR: floating rate note and loan considerations

Overview of the IBA Announcement

The administrator of USD LIBOR, ICE Benchmark Administration Limited (“IBA”), has recently announced (the “Announcement”) that it expects to consult the market in early December 2020 on its intention to cease the publication of:

  • the one week and two month USD LIBOR settings immediately following the LIBOR publication on 31 December 2021; and
  • the remaining (i.e. overnight and one, three, six and 12 month) USD LIBOR settings immediately following the LIBOR publication on 30 June 2023.

This Announcement follows the 18 November 2020 announcement that the IBA would consult on its intention to cease the publication of all GBP, EUR, CHF and JPY LIBOR settings immediately following the LIBOR publication on 31 December 2021. The IBA expects to commence this as part of the same consultation as for USD LIBOR settings.

The IBA expects to close the consultation for feedback by the end of January 2021.

If the above proposal is adopted by the IBA in its consultation conclusions, this will be a welcome development in the international floating rate note and loan markets. For example, extending the publication of the three month USD LIBOR setting commonly used in floating rate notes to 30 June 2023 would allow more legacy USD LIBOR floating rate notes to mature before LIBOR experiences disruptions.

The IBA and ISDA have indicated that the Announcement and the other announcements referred to below should not be read as announcing that the LIBOR benchmark has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative for the purposes of fallback language adopted by ISDA.

US regulators response to the Announcement

Relevant US agencies have also published a statement (the “US statement”) in response to the Announcement. The US statement includes a supervisory guidance encouraging banks to cease entering into new contracts that use USD LIBOR (with a robust fallback) as a reference rate as soon as practicable and in any event by 31 December 2021, in order to facilitate an orderly LIBOR transition. This should give market participants some respite to ensure a smooth transition from USD LIBOR. Previously the Alternative Reference Rates Committee (ARRC) had recommended, in its best practices for completing transition from LIBOR, that no floating rate notes using USD LIBOR and maturing after 2021 should be issued after 31 December 2020.

UK FCA response to the Announcement

The UK Financial Conduct Authority (the “FCA”) has also published a response to the Announcement. The FCA has said that it welcomes and supports the IBA proposal to consult on a clear end date to USD LIBOR as it will incentivise swift transition while allowing time to address a significant proportion of legacy contracts that reference USD LIBOR. The FCA also welcomes the US supervisory guidance to limit new use of USD LIBOR after the end of 2021. Under the UK Financial Services Bill introduced to the UK Parliament on 21 October 2020, the FCA would receive new powers to prohibit some or all new use by UK supervised entities of a critical benchmark (such as LIBOR currency-tenor settings) where a benchmark administrator has confirmed its intention that the benchmark will cease. The FCA has said that it would not envisage using these new powers before the end of 2021. The FCA also expects to consider how any limitations that it applies on new use of USD LIBOR by UK supervised entities after the end of 2021 could be best coordinated with any appropriate measures taken in the US.

Conclusions

Floating rate note market participants should continue to remove their dependency on USD LIBOR to ensure a smooth LIBOR transition (for example, by issuing SOFR-linked floating rate notes). The IBA proposal (if adopted) should facilitate the LIBOR transition by allowing more legacy USD LIBOR floating rate notes to mature before LIBOR experiences disruptions. In addition, the US statement should give market participants some respite on the use of LIBOR-linked floating rate notes (with a robust fallback) until the end of 2021.

A Chinese translation of this client note will follow shortly.