Firms now have less than a year to manage the transition away from LIBORs in non-USD currencies.
End-2020 announcements clarified the timetable for transition from LIBOR.
ICE Benchmark Administration, the LIBOR administrator is consulting (PDF 607 KB) on ceasing the publication of all LIBOR tenors on 31 December 2021. The only exception will be USD LIBOR tenors for overnight and 1, 3, 6 and 12 months, which would cease on 30 June 2023. This likely extension of the deadline for the major USD LIBOR tenors will allow many more legacy USD contracts to mature before LIBOR ceases.
In the derivatives market, the ISDA IBOR fallback protocol became effective from 25 January for parties that have signed up to the protocol. For other products, national risk-free rate (RFR) working groups have been producing guidance and setting deadlines to help firms actively transition their contracts to RFRs or other rates, such as bank base rate. After industry feedback that it would be difficult to transition all products to overnight RFRs, term-rate RFRs are now becoming available for use in very limited circumstances.
Regulators are also putting in place measures to manage the risks around “tough legacy” products that cannot be transitioned from LIBOR. In the EU, political agreement has been reached on amendments to the EU Benchmarks Regulation allowing the European Commission to designate a replacement benchmark for a widely-used reference rate that is phased out, i.e. LIBOR. However, the Commission emphasised that it is still in market participants' best interests actively to transition to alternative reference rates.
In the UK, the FCA set out its potential approach to the use of proposed new powers under the Financial Services Bill to ensure an orderly wind-down of LIBOR. It would require continued publication based on a changed methodology to produce a “synthetic LIBOR”. Under the conditions proposed, the FCA is unlikely to use its powers to require continued publication of EUR and CHF LIBORs as they have smaller “tough legacy” populations, but it will use its powers for heavily used sterling tenors and possibly for JPY tenors.
As the deadlines approach, firms should expect close supervisory oversight of their LIBOR transition plans, including the management of conduct risks that could arise.