Sound Bites Series: FCA Statement on LIBOR Shutdown | Dentons

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While phasing out LIBOR and replacing it with risk-free rates (RFRs) remains a hot topic, the Financial Conduct Authority (FCA) released a new update on March 5, 2021. In summary, this confirmed, between others, the future termination or loss of representativeness of the 35 LIBOR parameters currently published by ICE Benchmark Administration Limited.

Why is this relevant for Middle Eastern banks / businesses?

This can affect a number of financial products (for example, loans and derivatives), particularly because US dollar denominated financial products entered into by banks and businesses in the Middle East routinely use LIBOR. in US dollars as a benchmark in calculating interest or, in an Islamic context, the rate of profit. The 26 LIBOR parameters to be ceased permanently also include:

  • Immediately after December 31, 2021: 1 week and 2 month US dollar LIBOR parameters; and
  • Immediately after June 30, 2023: Day-to-day and 12-month LIBOR settings in US dollars.

The FCA will also consider whether to require IBA to continue to publish 1-month, 3-month and 6-month US dollar LIBOR on a non-representative synthetic basis for a further period after the end of June 2023. These parameters will no longer be applicable. be representative and representativeness will not be restored immediately after June 30, 2023. Although the publication of certain LIBOR parameters on a synthetic basis is intended to assist existing contracts, a new use of this synthetic LIBOR by regulated companies in the UK. United in regulated financial instruments would be prohibited by the BMR as amended by the Financial Services Bill.

Immediate practical importance

Accordingly, we share with you four points about the immediate practical significance of this for financial documents (whether structured on a conventional or Islamic basis) that are useful to keep in mind (noting that the points 1 and 2 are probably the key points for the current objectives, although points 3 and 4 may also be relevant under the terms of the financial documents concluded recently):

1. Only the consent of the Majority Lender / Majority Participant is required to change the interest / profit rate provisions in US Dollar LIBOR-based facilities with replacement rate clauses.

A “Screen Rate Replacement Event” will have occurred in connection with certain LIBOR-based Syndicated Loan Financing Agreements / Documents. Note, in particular, the following two members of the current definition of AML:

  1. “The Supervisor of the Screen Rate administrator publicly announces that this Screen Rate has been or will be definitively or indefinitely interrupted; “
  2. “in the case of [a Screen Rate for LIBOR], the supervisor of the administrator of this Screen Rate makes a public announcement or publishes information… indicating that this Screen Rate is no longer or, at a specified future date, will no longer be representative of the underlying market or reality economic that it is intended to measure and that representativeness will not be restored (as determined by this supervisor). (However, note that this branch was not suggested by the LMA until October 2020, so it is unlikely to feature in many agreements.)

When a screen rate override event has occurred, interest / profit rate related changes may be made with the consent of the Majority Lender / Majority Participant, rather than all Lenders / Participants.

2. Greater certainty regarding termination of US dollar LIBOR as of June 30, 2023

Although it has been expected since November 2020 that US Dollar LIBOR will continue to be published in all key tenors until the end of June 2023, this announcement confirms that this will be the case.

3. In any existing switching installation, a “rate switching trigger event” may have occurred.

However, this does not mean that the switch from LIBOR to RFRs will have happened automatically. Based on the LMA Exposure Drafts, the “Date of Rate Change Triggering Event” due to the “Rate Change Trigger Event” will be the anticipated disruption / non-representativeness date, rather than the March 5, 2021. on the “Backstop rate change date” specified in the agreement.

4. On the new conversion or RFR facilities, there should no longer be any debate about how the credit adjustment spread is calculated, or when.

One would expect that new facility agreements that include a credit adjustment spread would simply refer to the relevant “official” credit adjustment spreads calculated and published by Bloomberg on March 5, 2021 for fallback purposes. ISDA (available here), rather than including a methodology to calculate the variance at a later date.

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