IBA and FCA LIBOR announcements trigger benchmark transition process


The ICE Benchmarks Administration (IBA) announced on March 5 that all LIBOR (London Interbank Offered Rate) parameters would cease to be provided by an administrator or would no longer be representative. This change will occur immediately after December 31 in the case of all GBP, Euro, CHF and JPY LIBOR parameters, and in the case of one-week and two-month USD LIBOR parameters; and immediately after June 30, 2023, in the case of the remaining USD LIBOR parameters. the UK Financial Conduct Authority confirmed the IBA’s announcement the same day. While this announcement confirms that most USD LIBOR maturities will continue after the end of 2021 for existing contracts, U.S. banking regulators have said they believe using USD LIBOR after December 31 for the new contracts presented risks to safety and soundness, and banks will be reviewed on this basis.

In anticipation of a transition away from LIBOR, the Federal Reserve Board formed the Alternative Reference Rates Committee (ARRC), a group of private market actors brought together by the Board and the Federal Reserve Bank of New York in cooperation with d ‘other banking regulators. ARRC has prepared language for market participants to address the transition from LIBOR to the guaranteed overnight rate (SOFR), a new benchmark. Many lenders and administrative officers for syndicated loan facilities have incorporated ARRC fallback language or a variant into their loan documents. In the language recommended by the ARRC, one of the trigger events for a “benchmark index transition event” is a public statement or publication of information by or on behalf of the administrator of an index. benchmark (in this case, IBA) announcing that the administrator has ceased or will cease providing all available grades of the benchmark (or its constituents), either permanently or indefinitely.

The ARRC confirmed on March 9 that the March 5 announcements from IBA and FCA are a benchmark transition event for all USD LIBOR parameters, in accordance with ARRC recommended language for new issues or the creation of variable rate LIBOR notes, securitizations, loans and bilateral commercial loans. The effect of a baseline transition event is to establish the start of the transition process.

The initial consequence of the benchmark transition event is that bilateral loan lenders and syndicated loan officers will most likely need to notify borrowers and other lenders of the occurrence of the event. While interest rates won’t move away from LIBOR until the end of 2021 or 2023, depending on the currency and the rate, notice is still required under the ARRC fallback language. The Loan Syndications and Trading Association (LSTA) has provided a generic form of notice that can be tailored for the specific use of a lender or agent.

Since the preferred substitute for LIBOR in the United States is SOFR, a risk-free rate, the market recognizes that a spread adjustment will be necessary to ensure as neutral a transition as possible between borrower and lender. The second consequence of the Benchmark Transition Event is to establish this spread adjustment. The International Swaps and Derivatives Association (ISDA) has declared that the FCA’s announcement constitutes an “index termination event” and, as a result, the ISDA relief spread adjustments published by Bloomberg have been set at the date of this announcement for all LIBORs. reference parameters. The ARRC has agreed that these spread adjustments will apply to loans and derivatives.

Market participants are expected to review their alternate LIBOR language to determine their specific obligations following the March 5 announcements, in particular the notices they must provide. In addition, after March 5, the LIBOR replacement language used in new loan facilities (or modifications to existing ones) should be adjusted for the fact that the baseline transition event has occurred and the The gap adjustment was determined.

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