LIBOR Transition - Key Announcements from the FCA, ISDA and Bloomberg

The FCA Formally Announces the End of LIBOR – ISDA Fixes the Spread Adjustment in its IBOR Fallbacks Supplement and Protocols – Bloomberg Fixes its Spread Adjustment

The Financial Conduct Authority (FCA) today formally announced the future cessation or loss of representativeness of the 35 LIBOR benchmark settings currently published by the ICE Benchmark Administration (IBA), which is regulated by the FCA. This, in turn, triggered related IBOR events which allowed ISDA to announce the fixing of the spread adjustments in their IBOR Fallbacks Supplement and Protocols and Bloomberg to announce the fixing of its Spread Adjustment.

The FCA Announcement

In its announcement, the FCA confirmed that the following 26 LIBOR settings will permanently cease:

Publication of all 7 euro LIBOR settings, all 7 Swiss Franc LIBOR settings, The Spot Next, 1-week, 2-month and 12-month Japanese yen LIBOR settings, the overnight, 1-week, 2-week and 12-month sterling LIBOR settings and the 1-week and 2-month US dollar LIBOR settings will cease immediately after 31 December 2021.

Publication of the overnight and 12-month US dollar LIBOR settings will cease immediately after 30 June 2023.

Of the remaining LIBOR settings, the FCA will consult on requiring the IBA to publish the three remaining sterling LIBOR settings (1-month, 3-month and 6-month) for a further period after end-2021 on a changed methodology (also known as a ’synthetic’) basis using the proposed new powers being granted to it by the UK government under the UK Benchmark Regulation (BMR). This is intended to protect consumers and market integrity by reducing the disruption in markets where it is unlikely to be feasible to convert certain outstanding contracts that reference LIBOR to alternative reference rates.

The FCA stressed that the use of synthetic sterling LIBOR settings, by UK regulated firms, would be to assist legacy contract holders only and that new use of the synthetic settings would be prohibited under the BMR.

The FCA will also consult on requiring the IBA to continue to publish the 1-month, 3-month and 6-month Japanese yen LIBOR settings after end-2021 on a synthetic basis, for one additional year. This would allow more time for transition away from Japanese LIBOR to complete. The FCA does not envisage publishing any Japanese LIBOR settings after end 2022 and publication of these settings will cease permanently on 30 December 2022.

As the transition away from US dollar LIBOR progresses, the FCA will continue to consider the case for using these powers to require publication, on a synthetic basis, of the 1-month, 3-month, and 6-month US dollar LIBOR settings for a period after end-June 2023, taking into account views and evidence from the US authorities and other stakeholders.

The ISDA Announcement

Concurrently, the International Swaps and Derivatives Association, Inc. (ISDA) published a response fixing the spread adjustment in its IBOR Fallbacks Supplement and Protocols.

It said:

“Today’s announcement constitutes an ‘index cessation event’ under the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol for all 35 LIBOR settings. As a result, the fallback spread adjustment published by Bloomberg is fixed as of the date of the announcement for all euro, sterling, Swiss franc, US dollar and yen LIBOR settings (see below).

“The fallbacks (i.e., to the adjusted risk-free rate plus spread) will automatically occur for outstanding derivatives contracts that incorporate the IBOR Fallbacks Supplement or are subject to adherence of the ISDA 2020 IBOR Fallbacks Protocol on the following dates:

After December 31, 2021: For outstanding derivatives referenced to all Euro, sterling, Swiss franc and yen LIBOR settings.

 After June 30, 2023: For outstanding derivatives referenced to all US dollar LIBOR settings. Under the fallbacks methodology, the rate for the one-week and two-month US dollar LIBOR settings will be computed by each calculation agent using linear interpolation between end-2021 and June 30, 2023, before falling back to the adjusted risk-free rate plus spread after June 30, 2023.

The Bloomberg Announcement

Bloomberg Index Services Limited confirmed that under the Bloomberg IBOR Fallback Rate Adjustments Rule Book, the FCA Announcement will constitute a “Spread Adjustment Fixing Date” for each LIBOR currency and tenor. Therefore, for all 35 LIBOR settings, the spread component of the ISDA IBOR fallback rates was fixed on 5 March 2021. The fixed spread adjustment for each LIBOR currency and tenor will be available for use in contractual fallbacks and/or active conversion in the loan and bond markets in accordance with the terms set out by Bloomberg.

Going forward, the ‘Fallback Rate’ calculated for each ‘Rate Record Day’ (as defined in the Bloomberg Rule Book) from and including 5 March 2021 will use the Fixed Spread Adjustments as published by Bloomberg. All Fallback Rates calculated for a Rate Record Day prior to 5 March 2021 will use the Spread Adjustment published for that Rate Record Day.

LIBOR and IBOR transition is a field in which FMCR’s market practitioners have considerable experience and expertise which can be tailored for those clients requiring help to make the transition.