11 mars 2021 William Liu - Chong Liew - Stephen Song - Michael Ng - Maggie Ng - Hanwen Yu - I-Ping Soong - Philip Badge - Amit Singh - Jonathan Horan - Fiona Gray Banking - Capital Markets - Debt - Derivatives - Structured Finance

Asia - FCA LIBOR Cessation Announcement: the end in sight

The Financial Conduct Authority (the “FCA”) announced on 5 March 2021, the future cessation or loss of representativeness of all 35 LIBOR benchmark settings currently published by IBA (the “FCA Announcement”). The FCA Announcement follows the notification by ICE Benchmark Administration (the “IBA”) to the FCA that it intends to cease providing all LIBOR settings for all currencies, subject to any rights of the FCA to compel IBA to continue publication.

The FCA Announcement confirms (i) that the FCA will not require any panel banks to continue to submit to LIBOR beyond the dates from which they have notified their departure and (ii) its intentions regarding the use of its proposed new powers (which are set out in the Financial Services Bill) to compel IBA to continue to publish certain LIBOR settings on a ‘synthetic’ basis.

The FCA confirms that it has no intention of using its proposed powers to compel IBA to continue to publish any of the following 26 LIBOR settings on a ‘synthetic’ basis and, consequently, the following LIBOR settings will cease to be provided permanently:

all tenors of EUR LIBOR and CHF LIBOR, the spot next, 1-week, 2-month and 12-month JPY LIBOR settings, the overnight, 1-week, 2-month and 12-month GBP LIBOR settings and the 1-week and 2-month USD LIBOR settings immediately after 31 December 2021; and
the overnight and 12-month USD LIBOR settings immediately after 30 June 2023.

The FCA will, however, consult on whether it should use its proposed powers to require IBA to continue publishing:

the 1-month, 3-month and 6-month GBP LIBOR settings for a further period after end-2021 on a ‘synthetic’ basis; and
the 1-month, 3-month and 6-month JPY LIBOR settings for one additional year after end-2021 (i.e. until the end of 2022) on a ‘synthetic’ basis, after which these three JPY LIBOR settings would cease permanently.

In respect of the 1-month, 3-month and 6-month USD LIBOR settings, the FCA will continue to consider the case for using its proposed powers to require IBA to continue publishing these settings on a ‘synthetic’ basis for a further period after end-June 2023, taking into account views and evidence from the US authorities and other stakeholders.

The FCA Announcement also notes that publication of certain LIBOR settings on a ‘synthetic’ basis would be intended to assist legacy contract holders and new use of this ‘synthetic’ LIBOR by UK regulated firms would be restricted. The FCA confirmed it will consult later in 2021 on which legacy uses of ‘synthetic’ LIBOR might be permitted, as continued use by regulated firms would be subject to the FCA using its proposed powers to permit this.

Finally, the FCA confirmed that, even if it does require IBA to continue publishing any of these 9 LIBOR settings on a ‘synthetic’ basis, such settings will no longer be representative of the underlying market and economic reality that such setting is intended to measure and representativeness will not be restored as set out below:

for 1-month, 3-month and 6-month JPY and GBP LIBOR, immediately after 31 December 2021; and
for 1-month, 3-month and 6-month USD LIBOR, immediately after 30 June 2023.

Therefore, all 35 LIBOR settings will either cease to be provided or no longer be representative after the dates set out in the preceding paragraphs.

Shortly after publication of the FCA Announcement, IBA also published (i) a statement which directed LIBOR users to the FCA Announcement and (ii) a summary of responses to its consultation on the potential cessation of LIBOR, which closed on 25 January 2021.

Derivatives

As set out in the statement published by ISDA on 5 March 2021, ISDA Statement on UK FCA LIBOR Announcement, for the purposes of Supplement number 70 to the 2006 ISDA Definitions (the “IBOR Fallbacks Supplement”):

the FCA Announcement constitutes an “Index Cessation Event” in respect of all LIBOR currencies and tenors;
the first London Banking Day on or after 1 January 2022 will constitute an “Index Cessation Effective Date” in respect of all tenors of EUR LIBOR, CHF LIBOR, JPY LIBOR and GBP LIBOR and the fallbacks to the adjusted risk-free rate plus spread will apply from this date; and
the first London Banking Day on or after 1 July 2023 will constitute an “Index Cessation Effective Date” in respect of all tenors of USD LIBOR and the fallbacks to the adjusted risk-free rate plus spread will apply from this date. The operation of Section 8.5 (Discontinued Rates Maturities) of the IBOR Fallbacks Supplement means that the rates for 1-week and 2-month USD LIBOR will be determined between the first London Banking Day on or after 1 January 2022 and 30 June 2023 on the basis of linear interpolation between a shorter and a longer remaining and not “Non-Representative” USD LIBOR tenor.

The same outcome will apply under the terms of the ISDA 2020 IBOR Fallbacks Protocol (the “IBOR Fallbacks Protocol”).

ISDA has also published a more detailed guidance note on the FCA Announcement, ISDA Guidance: UK FCA Announcement on the LIBOR Benchmarks.

A timeline of the relevant events and their impact on the various LIBOR settings under the IBOR Fallbacks Supplement can be found here. For more details on LIBOR reform, the IBOR Fallbacks Supplement and the IBOR Fallbacks Protocol, please see our recent client webinar here and a previous client note here.

The Bloomberg spread adjustment

Bloomberg Index Services Limited has confirmed that under the Bloomberg IBOR Fallback Rate Adjustments Rule Book, the FCA Announcement will constitute a “Spread Adjustment Fixing Date” for each LIBOR currency and tenor. Therefore, for all 35 LIBOR settings, the spread component of the ISDA IBOR fallback rates was fixed on 5 March 2021. The fixed spread adjustment for each LIBOR currency and tenor will be available for use in contractual fallbacks and/or active conversion in the loan and bond markets in accordance with the terms set out by Bloomberg.

Repackagings and structured notes

The impact of the FCA Announcement on repackagings and balance sheet structured products will depend on the precise terms of the triggers and fallback provisions included in the relevant documentation. Issuers and arrangers should review the terms of any affected transactions and related hedges (which may or may not incorporate the IBOR Fallbacks Supplement) promptly to determine the impact on their transactions.

Where transactions do not contain non-representativeness triggers and/or index cessation triggers that contemplate cessation taking effect as of a specified future date, as may be the case in older deals in particular, the FCA Announcement may not result in a fallback being triggered.

Where a fallback has been triggered, the Issuer or Calculation Agent may be required to take action such as making notifications and/or determining any amendments that may need to be made to the transaction documents as of the effective date of the fallback. Similar to the position under the IBOR Fallbacks Supplement, it is likely that the effective date will be the actual date on which the relevant rate becomes non-representative or ceases to be published, as applicable (however, this could vary depending on the precise terms of the fallback and trigger).

Loans

In respect of the loan market, the FCA Announcement constitutes a “Rate Switch Trigger Event” under:

the LMA Exposure Draft Multicurrency Term and Revolving Facilities Agreement Incorporating Rate Switch Provisions (Lookback without Observation Shift) published on 11 September 2020;
the LMA Exposure Drafts of the Multicurrency Term and Revolving Facilities Agreement Incorporating Rate Switch Provisions (Lookback without Observation Shift) and the Multicurrency Term and Revolving Facilities Agreement Incorporating Rate Switch Provisions (Lookback with Observation Shift), each published on 23 November 2020; and
the APLMA discussion drafts US dollar Term and Revolving Facilities Agreement Incorporating Rate Switch Provisions (Daily Simple and Compounded) published on 23 December 2020,

in respect of each relevant LIBOR currency, irrespective of the tenors of interest period capable of selection under the Facilities Agreement. A “Rate Switch Date” will occur in respect of each relevant LIBOR currency on 1 January 2022, except to the extent an earlier date has been specified in the definition of “Rate Switch Date”. This remains the case, notwithstanding that certain U.S. Dollar LIBOR tenors will not cease to be published on that date and that certain Sterling and Yen LIBOR tenors possibly may continue to be published on a “synthetic” basis after that date. The LMA and APLMA drafting also provides that the Agent is required to notify the Borrower and the Lenders of the occurrence of the Rate Switch Trigger Event and this is the case even if an earlier date has been specified in the definition of Rate Switch Date. In each case, however, the precise terms of the triggers and notification requirements included in the relevant loan documentation would need to be considered in light of the FCA Announcement.

The FCA Announcement also constitutes a “Screen Rate Replacement Event” in relation to a Facilities Agreement incorporating the LMA Replacement of Screen Rate drafting (and may do so under the APLMA equivalent). This drafting provides that an amendment to incorporate a Replacement Benchmark may be made with a specified majority of Lenders rather than requiring all Lenders. This drafting does not, however, require any specific action following the occurrence of the Screen Rate Replacement Event.
If however the Replacement of Screen Rate wording incorporates an agreed process for renegotiation to an alternative benchmark rate, the triggers for the commencement of that process should be checked in the relevant Facilities Agreement.

In relation to a Facilities Agreement that references USD LIBOR, and which incorporates the ARRC hard-wired fallback language, the FCA Announcement will constitute a “Benchmark Transition Event”. The Benchmark Replacement Date will be the date on which the benchmark administrator ceases to provide all tenors of U.S. Dollar LIBOR that may be selected as interest periods under the Facilities Agreement or if earlier the date of announcement by the FCA that all such tenors are no longer representative.

Bonds

While, in the majority of cases, the FCA Announcement is unlikely to result in the operation of fallbacks in floating rate notes referencing LIBOR, the precise terms of the triggers and fallbacks included in the relevant bond documentation will need to be considered in light of the FCA Announcement.

Prior to permanent cessation of LIBOR having been contemplated by the market, the majority of fallbacks in bond documentation were drafted in contemplation of a temporary unavailability of LIBOR. These fallbacks will typically apply when a relevant rate is not available. Therefore, the FCA Announcement, by itself, will not trigger the operation of these fallbacks.

Following Andrew Bailey’s July 2017 speech on the future of LIBOR, bond documentation began to include fallback triggers which contemplated the permanent cessation of LIBOR. However, there is no market standard fallback language in Europe or Asia and the provisions included have evolved over time, including in some cases with a pre-cessation trigger linked to a statement that a benchmark will no longer be representative.

For those LIBOR settings which the FCA has stated will permanently cease to be published, the FCA Announcement will likely constitute a trigger event, however, the operation of the fallbacks will typically (in most cases, though there could be variation) be the date of the actual cessation of publication of the relevant LIBOR rate. For those settings which the FCA has stated will no longer be representative as of a future date, where the fallback language includes a trigger based upon a statement that the original benchmark will no longer be representative, the FCA Announcement may constitute a trigger event (again depending upon the specific drafting), however it is unlikely to result in the operation of fallbacks which, in most cases, will apply from the actual date from which the relevant LIBOR rate is no longer representative rather than any earlier date.

In relation to floating rate notes that reference USD LIBOR, and which incorporate the ARRC fallback language (including the pre-cessation trigger), the FCA Announcement does not appear on its face to constitute a “Benchmark Transition Event” for notes referencing the USD LIBOR settings which the FCA has stated will no longer be representative after 30 June 2023 (the 1-month, 3-month and 6-month USD LIBOR settings), as the ARRC “Benchmark Transition Event” in relation to non-representativeness (limb (3)) only applies if the FCA announces that USD LIBOR is no longer representative. The FCA Announcement states that the relevant USD LIBOR settings will no longer be representative immediately after 30 June 2023.

For any notes refencing the USD LIBOR settings which the FCA has announced will cease, the FCA Announcement will constitute a “Benchmark Transition Event”, but the effective date for the benchmark replacement (“Benchmark Replacement Date”) will be the date on which the benchmark permanently ceases to be provided.

In the ARRC’s view however, based on an FAQ document published on 8 March 2021, the statements of 5 March 2021 constitute a “Benchmark Transition Event” for all USD LIBOR settings. However, the occurrence of such “Benchmark Transition Event” does not require an immediate transition under the ARRC-recommended fallback language. Actual transition is based upon the “Benchmark Replacement Date”.

For more information, please get in touch with your usual Linklaters contacts.