June 30, 2023 - Another Milestone in LIBOR Transition

It has been over two years since the UK Financial Conduct Authority (FCA) announced that all LIBOR settings will cease to be provided and market participants will not be permitted to reference LIBOR in their contracts. Since that announcement, various regulators, industry bodies and market participants have worked to transition from LIBOR to using risk free rates (RFR) in contracts.

June 30, 2023 is another major milestone in the transition from LIBOR to RFR as the remaining five USD LIBOR settings will cease to be published on a representative basis. After June 30, market participants will no longer be able to enter into new contracts that reference overnight, one-month, three-month, six-month and 12-month USD LIBOR and any existing legacy contracts that mature after June 30 should be amended to reference SOFR or include relevant fallback provisions. To avoid any operational issues or market disruptions, parties must ensure they are operationally ready to trade on SOFR and should not delay remediating existing contracts. With less than one month to go until the last five USD LIBOR setting cease to be publish on a representative basis, market participants must act now.

Regulators and authorities are conscious that market participants may not be able to remediate all of their legacy contracts and have introduced solutions for such ‘tough legacy contracts’.  

United States

The Alternative Reference Rate Committee (ARRC) recently published a summary of key recommendations in which the ARRC encourages all market participants to take action immediately to cease referencing the remaining USD LIBOR settings. Legacy contracts that reference USD LIBOR without fallback language should be amended to either reference RFRs or to include adequate fallback language to RFRs.

In December 2022, the US Federal Reserve Board adopted a final rule that implements the Adjustable Interest Rate (LIBOR) Act (the LIBOR Act). The LIBOR Act replaces USD LIBOR with SOFR-based rates in tough legacy contracts (including derivatives) governed by US law that do not include clear and practicable provisions for replacing USD LIBOR.  While this is a useful tool to ensure tough legacy contracts transition to SOFR, market participants should view it as a last resort. The ARRC and other industry bodies such as the Federal Reserve Board, CFTC and Financial Stability Oversight Council encourage market participants to actively transition.

United Kingdom 

The transition of USD LIBOR contracts governed by non-US law and therefore not covered by the LIBOR Act may be more challenging due to the diverse investor base and the larger total volume of such contracts (compared to sterling and yen LIBOR contracts when those ceased to be published). The FCA recognized that market participants, party to such non-US law USD LIBOR contracts, could benefit from an additional period of time to transition to SOFR. In early April 2023, the FCA announced its decision to require the ICE Benchmark Administration to continue publishing one-month, three-month and six-month USD LIBOR settings on an unrepresentative ‘synthetic’ basis to allow tough legacy contracts (other than cleared derivatives contracts) entered into on or prior to June 30, 2023 to reference these synthetic rates until September 30, 2024.

However, the FCA expects firms to continue to actively transition contracts that reference USD LIBOR, and synthetic USD LIBOR is only a temporary solution to help ensure an orderly wind-down of USD LIBOR.

European Union (EU)

The EU legislative fix has been in place since February 2021 through amendments to the EU Benchmarks Regulation which applies to contracts with either no fallbacks or no suitable fallbacks to RFRs. The EU Benchmarks Regulation empowers the EU Commission to designate a replacement rate for LIBOR in contracts governed by the law of an EU member state and in contracts governed by third country laws where all parties are established in the EU and such third country does not have legislative solutions in place. To date, the EU Commission has not designated an alternative benchmark for USD LIBOR but the European RFR Working Group is monitoring the ongoing transition away from USD LIBOR to ensure any issues are brought to the attention of the relevant EU authorities.

Conclusion

The US, UK and EU legislative solutions for tough legacy contracts may overlap in scope, but they all emphasise the need for market participants to actively remediate legacy contracts and not merely rely on any legislative fix. Market participants should consider whether they are prepared for the cessation of the last remaining USD LIBOR settings and take action immediately to transition from LIBOR to RFRs.

Please contact the author of this briefing or your regular Crowell & Moring contact if you have questions about, or would like assistance with, the LIBOR transition.