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The end of LIBOR: We are not scaremongering — this is really happening

November 30, 2020 was bookended by a series of announcements that provided details on the prospective timing of LIBOR’s demise and will impact how market participants plan and prepare in the following months for LIBOR’s cessation.

The coordinated statements by both the official and private sector need to be read together. Pending the outcome of IBA’s consultation on the cessation of LIBOR, market participants now have a high degree of clarity on LIBOR’s cessation timeline: virtually all USD LIBOR product issuances will end after December 31, 2021, and USD LIBOR publication will end after June 30, 2023.

We have provided a summary of key announcements and takeaways from last week. For more information on these and other LIBOR transition related developments subscribe to PwC’s LIBOR Transition Market Update here.

ICE Benchmark Administration (IBA) announces plans for USD LIBOR and publishes consultation on cessation of LIBOR

On Monday, IBA announced it would consult on its plans for the discontinuation of USD LIBOR. That consultation, which also covers the remaining LIBOR currencies, was subsequently published on Friday. The key takeaways are:

  • IBA intends to end publication of all tenors of GBP, EUR, JPY and CHF LIBOR after December 31, 2021.
  • 1 week and 2 month USD LIBOR would also cease after December 31, 2021.
  • IBA expects to publish the remaining tenors of USD LIBOR, on a representative basis, into June 2023 and cease publication thereafter.

Comments on IBA’s publication are due by January 25, 2021.

U.S. regulators’ interagency guidance on the use of USD LIBOR

On Monday, the Federal Reserve Board (Fed), Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) issued guidance on the ongoing use of USD LIBOR. Key takeaways include:

  • Banks are encouraged to transition away from USD LIBOR as soon as practicable.
  • Banks should not enter into new transactions referencing USD LIBOR after December 31, 2021, given the potential safety and soundness concerns associated with new USD LIBOR contracts.
  • There may be limited instances in which entering into new USD LIBOR-based contracts would remain appropriate, such as for market making or purposes of hedging of existing LIBOR-based exposures.
  • Banks should expect to have their practices examined in light of potential safety and soundness concerns over new USD LIBOR contracts.

The statement represents the US regulators’ sternest warning to cease the issuance of new USD LIBOR products to date, effectively limiting the use of USD LIBOR after 2021 to a narrow set of transactions related to legacy USD LIBOR exposures.

FCA statement on USD LIBOR

The Financial Conduct Authority (FCA), IBA’s primary regulator, issued a statement of support of IBA’s intentions, welcoming the prospects of a clear end date to the USD LIBOR panel. Similar to the US regulators, it too suggested that it would consider limiting the use of USD LIBOR for FCA-supervised firms after 2021.

ISDA webinar featuring FCA, Fed and ARRC representation

On Friday, ISDA published a webinar featuring, among others, Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, David Bowman, Senior Associate Director at the Federal Reserve Board, and Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and Chairman of the ARRC. The webinar summarized the path forward for LIBOR, provided that IBA’s consultation confirms its plans. Key takeaways include:

  • Following IBA's consultation, it would be possible to make a single announcement on planned cessation dates for all currencies and tenors of LIBOR, i.e., an announcement would include planned cessation dates for certain USD LIBOR tenors continuing into 2023.
  • Such an announcement would trigger the fixing of the spread adjustment under the ISDA fallbacks.
  • Major USD LIBOR tenors are expected to continue, in representative fashion, after 2021. In other words, the FCA does not foresee the need to make a declaration of 'non-representativeness', meaning swaps and other derivatives in USD LIBOR could continue to reference a published, representative USD LIBOR into 2023.
  • The FCA could still make a statement of non-representativeness in the context of applying its powers to mandate a continued publication of computation based LIBOR settings, i.e. so-called “synthetic LIBOR.”
  • After 2021, 1 week and 2 month USD LIBOR fallbacks would be based on interpolation with USD LIBOR tenors that continue to be published. After June 2023, all USD LIBORs would fall back to a spread adjusted risk-free rate - in this case SOFR plus conversion spread.
  • The FCA would likely use its new powers under the UK BMR to restrict use of USD LIBOR for new contracts for FCA supervised firms after 2021, potentially based on the notion that it can restrict the use of a benchmark "known to be ceasing". However, the FCA’s plan of action remains dependent on the results of future market consultations to be issued in 2021.

A transcript of the webinar has been made available as well.

ARRC guide on the endgame for USD LIBOR

The ARRC published a summary of this week’s news and the implications for USD LIBOR going forward. Key takeaways include:

  • The guide highlights the interagency guidance and FCA’s statement, both of which call for an end to the issuance of new USD LIBOR contracts after 2021.
  • The ARRC’s recommendation to end the issuance of new USD LIBOR business loans after June 30, 2021 appears fully consistent with the US regulators’ expectation to cease the issuance of new USD LIBOR products as soon as practicable and no later than at the end of 2021.
  • The ARRC will continue to pursue a legislative solution for those LIBOR based contracts that are set to mature after June 2023, but contain no or ineffective fallback to address LIBOR’s permanent cessation.

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John Garvey

Global Financial Services Leader, PwC US

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Partner, PwC US

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US Deals, Strategy & Operations Leader for Tax Reporting & Strategy, PwC US

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Jeremy Phillips

Asset & Wealth Management, Partner, PwC US

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Financial Services, Partner, PwC US

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Principal, PwC US

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Capital Markets Strategy Partner, PwC US

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