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British and US regulators respond to ICE about end of Libor

Nihal Patel, Cadwalader Wickersham & Taft, Special counsel, New York, 2 December 2020

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The ICE Benchmark Administration (the IBA) is consulting interested parties about its intention to cease publishing the US$ version of the London Interbank Offered Rate. US banking regulators and the UK's Financial Conduct Authority have responded.

The consultative exercise concerns US$ Libor (1) in the case of 1-week and 2-month Libor, on December 31, 2021; and (2) in the case of overnight, 1-, 3-, 6- and 12-month Libor, on 30 June 2023. In separate statements, US banking regulators and the FCA responded to the IBA's announcement, which follows its previous announcement in November that it would consult firms about its intention to cease euro, sterling, SFr and yen Libor at the end of 2021.

The FCA (which regulates the IBA) "welcome[d] and support[ed]" the move by the IBA and said that it would co-ordinate its efforts with authorities around the world to consider how best to limit new use of US$ Libor after the end of 2021. The FCA also noted that under the Financial Services Bill introduced in Parliament in October, it was to receive new powers to stop British firms from using a "critical benchmark" (such as Libor) if it sees fit. It added that (i) it plans to consult people in the second quarter of 2021 about how best to use its power to prohibit some or all new use of US$ Libor and (ii) does not expect to use the power before the end of 2021. Once again, it encouraged market participants to move away from Libor, not least by adhering to the ISDA IBOR Fallbacks Protocol. The FCA also explicitly said that its statement should not be read as an announcement that US$ Libor has ceased or will cease, or that it is not or will not be "representative" for the purposes of the protocol. (ISDA issued a separate statement noting that the IBA and FCA statements do not constitute an "index cessation event" under the protocol or the recent amendments to the 2006 ISDA Definitions.)

A joint declaration

Separately, the Federal Reserve Board, the OCC and the FDIC issued a joint statement to encourage banks to move away from US$ Libor "as soon as practicable." The regulators said that extending Libor tenors to 30 June 2023 "would allow most legacy US$ Libor contracts to mature before Libor experiences disruptions." The statement also cautioned that "failure to prepare for disruptions to US$ Libor, including operating with insufficiently robust fallback language, could undermine financial stability and banks' safety and soundness" and that signing new contracts using US$ Libor as a reference rate after 31 December 2021 "would create safety and soundness risks and [we] will examine bank practices accordingly."

Limited circumstances for continued use

The statement recognised, however, that there "may be limited circumstances" when it would be appropriate to enter into new US$ Libor transactions and gave the following examples: (i) transactions executed for required participation in clearinghouse action procedures; (ii) market making in support of client activity related to US$ Libor transactions executed before January 2022; (iii) transactions that hedge or reduce a bank or bank client's US$ Libor exposure on contracts signed before January 2022; and (iv) novations of US$ Libor contracts executed before January 2022.

The Alternative Reference Rates Committee "applauded" the statements from the IBA, the FCA and the US banking regulators.

Statements of significance

The statements from the IBA and the regulators are extremely significant for market participants that are preparing to turn away from US$ Libor and are likely to be followed by further clarifications and market developments. For now, it seems clear that the regulators have been persuaded to permit US$ LIBOR to live on in some form for at least 18 months longer than most had previously expected. It is likely, however, that regulators on both sides of the Atlantic will continue to press for financial institutions to move away from US$ LIBOR as soon as practicable, despite the extended timetable for legacy US$ transactions.

* Nihal Patel can be reached on +1 212 504 5645 or at nihal.patel@cwt.com

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