On November 30, 2020, ICE Benchmark Administration Limited (“IBA”) announced its intention, in early December 2020, to consult on the proposed cessation of the publication of:
- the one-week and two-month USD LIBOR settings immediately following the LIBOR publication on December 31, 2021; and
- the overnight and one-, three-, six- and 12-month USD LIBOR settings immediately following the LIBOR publication on June 30, 2023.
IBA expects to close the consultation for feedback by the end of January 2021. IBA also noted that any publication of the overnight and one-, three-, six- and 12-month USD LIBOR settings based on panel bank submissions beyond December 31, 2021, will need to comply with applicable regulations, including as to representativeness.
The announcement was positively viewed by many regulators and other key market participants, including the following:
Financial Conduct Authority: https://www.fca.org.uk/news/statements/fca-response-iba-proposed-consultation-intention-cease-us-dollar-libor;
Federal Reserve Bank: https://www.federalreserve.gov/newsevents/pressreleases/bcreg20201130b.htm;
Securities and Exchange Commission: https://www.sec.gov/news/public-statement/clayton-libor-2020-11-30;
Alternative Reference Rates Committee: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2020/ARRC_Press_Release_Applauds_Milestone_Transition_US_Dollar_LIBOR.pdf;
International Swaps and Derivatives Association: https://www.isda.org/2020/11/30/isda-statement-on-iba-uk-fca-and-federal-reserve-board-announcements-on-us-dollar-libor-consultation/; and
Structured Finance Association: https://structuredfinance.org/news/structured-finance-association-supports-proposed-extension-of-usd-libor-for-legacy-contracts/.
Concurrently, the Board of Governors of the Federal Reserve Bank, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency also issued an Interagency Statement of LIBOR Transition (the “Statement”) that noted the IBA announcement and urged banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. New contracts entered into before December 31, 2021, should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation. According to the Statement, failure to do so would create safety and soundness risks, and bank practices will be examined accordingly.
While the IBA announcement adds welcome clarity to the timeline for LIBOR transition, the extension for overnight and one-, three-, six- and 12-month USD LIBOR settings to June 30, 2023, as noted in the Statement, may give many legacy USD LIBOR contracts the time needed to mature before LIBOR experiences disruption, which would not have been possible absent the extended cessation date.
However, the IBA announcement also raises some further questions, including the following:
- Will panel banks continue to make submissions after December 31, 2021, if, as previously announced, the FCA will not compel them to do so?
- Will, as many expect, the number and volume of underlying deposits continue to decline and, if so, will panel banks be concerned about increasingly using expert judgment to make submissions?
- How will legacy USD LIBOR contracts maturing after June 30, 2023 (or earlier if LIBOR experiences disruptions) be addressed?
We note that it is possible that the proposed June 30, 2023, extension is part of the “mechanism” referenced by Federal Reserve Board Vice Chair Quarles in recent testimony before the Senate Banking Committee as being discussed by banks and with the Federal Reserve, as well as the Financial Stability Board and the UK’s Financial Conduct Authority.
Expect additional clarity in the coming weeks.