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Americans agree on contractual language to replace Libor

Chris Hamblin, Editor, London, 26 April 2019


The US Alternative Reference Rates Committee has published its recommendations for contractual fallback language for US dollar Libor (London Interbank Offered Rate) denominated floating rate notes and syndicated loans.

These provisions are for market participants’ voluntary use in new contracts that refer to Libor and were developed with the goal of reducing the risk of serious market disruption in the event that Libor is no longer usable. This recommendation is part of the ARRC’s mandate to help address risks in contracts referencing Libor and it  builds on its work developing the Paced Transition Plan, which outlines the steps for an effective shift to the ARRC’s recommended alternative reference rate, the Secured Overnight Financing Rate (SOFR).

Tom Wipf of Morgan Stanley, the chairman of the ARRC, argued: “It’s no longer a question of if but when Libor will become unusable, yet most contracts referencing it don’t adequately account for this eventuality. With Libor’s possible 2021 expiration date looming, that obviously poses a massive risk to financial stability and market participants. The fallback language is a critical step in addressing that concern. We encourage market participants to incorporate this language into new contracts, and when possible, to begin writing contracts using SOFR instead of US dollar Libor.

The ARRC is a group of private-market participants convened by the Federal Reserve in 2014 to identify risk-free alternative reference rates for US dollar Libor.

On the subject of the rate-rigging that led to the Libor crisis and other scandals, Carlo Palombo and Colin Bermingham were recently sentenced to a total of 9 years' imprisonment at Southwark Crown Court in London for manipulating the Euro Interbank Offered Rate (Euribor) in 2008/9. Palombo used to be Barclays' vice president of euro rates and Bermingham was a managing director at the bank. They both conspired with a trader at Deutsche Bank called Christian Bittar and a Barclays director called Phillipe Moryoussef to make false or misleading Euribor submissions to change the published rate and benefit their positions.

Carlo Palombo was sentenced to 4 years. Colin Bermingham was sentenced to 5 years.

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