The Financial Conduct Authority (FCA) has formally announced the dates that LIBOR rates will either stop being published, or be deemed ‘not representative’. This has significant implications to the industry as it removes any uncertainty on when LIBOR will end.
The announcement follows the results of a consultation by ICE Benchmark Administration (IBA), LIBOR’s administrator, which confirmed IBA’s plans for the benchmark’s cessation. The FCA statement includes timelines for 35 LIBORs, summarised as follows:
LIBOR |
Tenor |
End of Panel Bank Submissions |
Potential Synthetic LIBOR Publication1 |
||
|---|---|---|---|---|---|
Date |
Result |
Begin |
End2 |
||
CHF |
ALL |
31 December 2021 |
Permanent cessation |
Not applicable |
|
EUR |
ALL |
31 December 2021 |
Permanent cessation |
Not applicable |
|
GBP |
Overnight, 1-week, 2-month, 12-month |
31 December 2021 |
Permanent cessation |
Not applicable |
|
1-month, 3-month, 6-month |
31 December 2021 |
Loss of representativeness |
1 January 2022 |
31 December 20313 |
|
JPY |
Overnight, 1-week, 2-month, 12-month |
31 December 2021 |
Permanent cessation |
Not applicable |
|
1-month, 3-month, 6-month |
31 December 2021 |
Loss of representativeness |
1 January 2022 |
31 December 2022 |
|
USD |
1-week, 2-month |
31 December 2021 |
Permanent cessation4 |
Not applicable |
|
Overnight, 12-month |
30 June 2023 |
Permanent cessation |
Not applicable |
||
1-month, 3-month, 6-month |
30 June 2023 |
Loss of representativeness |
1 July 20235 |
30 June 20333,5 |
|
LIBORs that have a ‘loss of representativeness’ may have continued publication on a ‘synthetic’ basis, i.e. ending their reliance on panel bank submissions and calculated based on a methodology to primarily assist with a very small subset of existing contracts where it is difficult to move to the new reference rate (so called ‘tough legacy’ contracts).
Key takeaways for businesses in Singapore
LIBOR now has a definitive expiration date
Market participants have consistently cited a lack of firm deadlines and lack of clarity on cessation timelines as major hurdles in the move away from LIBOR. With the IBA and FCA announcements confirming the overall timeline and key mechanisms of its cessation, firms that were hesitant in their preparations should now be able to move into much-needed action.
In Singapore, many corporates and banks deal with multi-currency borrowings, swaps and investments. The firm dates by currency means participants can navigate transition timelines with more confidence.
The use of USD LIBOR (and SOR) after 2021 will be severely limited
USD LIBOR will continue to be published until 30 June 2023, which will mean SOR in Singapore will continue to be published to this date. However, regulatory guidance in both jurisdictions clearly differentiates between dates that these ‘old’ rates are published to support transition for existing contracts, versus much earlier timelines for new contracts. For example:
- USD LIBOR not to be used in new contracts after 31 December 2021, and
- SOR is not to be used in new lending contracts after 30 April 2021.
So whilst the USD LIBOR and SOR June 2023 provide relief for transitioning existing contracts, in reality businesses cannot afford to de-prioritise these currency exposures in their overall IBOR transition programmes.
The fixing of the ‘spread adjustment’ provides an economic baseline from which to transition exposures for most IBORs
The announcement triggers the calculation and fixing of ‘spread adjustments’ that are intended to account for the economic differences between LIBORs and their risk-free rate (RFR) replacements. These adjustments include approaches such as a 5 year historical median of the difference between the two relevant rates.
Spread adjustments are now fixed for all LIBOR settings, including any USD LIBOR tenors that will continue to be published into 2023. The finalised spread adjustments provide a baseline for renegotiation of existing LIBOR-based contracts, but do not dictate pricing of new RFR contracts. We do expect that the finalised spread adjustment will increase the volume of contracts on new RFRs as this baseline spread reduces the economic uncertainty for corporates and lenders transacting in new RFR loans.
The announcements will trigger some immediate actions
In contracts containing provisions addressing LIBOR’s cessation (i.e. “fallbacks”), LIBOR references won’t actually be replaced until the actual cessation date. But many contracts, commonly those requiring parties to bilaterally agree upon a replacement rate, contain notification requirements. Some lenders and administrative agents might be required to issue certain notices immediately.
Irrespective of contractual language, the announcements will raise general awareness of LIBOR’s cessation. Customer inquiries are almost certain to increase in volume. Financial institutions should ensure that they are able to identify if notices are required to be issued and that client-facing staff can respond appropriately to any inquiries.
What should you do next?
LIBOR end dates are now set, and they are not far away. We see the following as some key priorities for businesses in 2021.
| Sell-side (banks) | Buy-side (corporates, insurers, asset and wealth managers) |
|---|---|
|
|
For more information, read the full update on our Global LIBOR page.
How we can help
We are working with a large number of lenders and borrowers in Singapore and globally to accelerate transition impact analysis and launch of new RFR products with tried and tested tools including:
- Contract identification and analysis tools
- RFR interest rate and valuation impact calculators
We have experience in delivering awareness and educational webinars to clients as well as through industry channels. Some helpful links to SORA related resources in Singapore to help Corporates include:
Notes
1Publication of synthetic LIBOR is contingent on subsequent FCA consultations
2Each of the LIBORs would permanently cease publication following the end of the synthetic LIBOR publication period
3The FCA’s powers allow them to compel publication of synthetic LIBOR for a period of up to 10 years, subject to an annual review during that time
4Under the ISDA fallbacks, 1w and 2m USD LIBOR settings will be computed by the calculation agent using linear interpolation between end of 2021 and 30 June 2023, before falling back to the adjusted risk-free rate plus spread adjustment
5The FCA noted they will “consider the case” for using the proposed powers under UK benchmark regulation legislation to require continued publication of 1-, 3-, and 6-month USD LIBOR settings on a synthetic basis after 30 June 2023
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