MBA LIBOR Transition Updates
It has been a busy time for LIBOR transition progress, so here are the latest updates.
- ICE, FCA and Fed/OCC/FDIC Updates on Transition Timelines: This week there were several coordinated announcements addressing and altering the expected timelines associated with the transition away from LIBOR. ICE Benchmark Administration, the administrator of LIBOR, announced it is consulting on its plans for ceasing publication of various USD LIBOR prints. ICE proposes to discontinue only the one-week and two-month USD LIBOR tenors on December 31, 2021, while all other USD LIBOR tenors would cease publication on June 30, 2023.
As a reminder, ICE is also consulting on its plans to cease publication of all LIBOR prints in other currencies on December 31, 2021. Note that these are not final decisions from ICE, but rather proposed timelines on which ICE is seeking input.
The UK Financial Conduct Authority–the regulator of LIBOR–issued a statement supporting ICE’s consultations and the potential for an extended timeline for the sunset of certain USD LIBOR tenors. Importantly, the FCA noted that this extension will help address legacy LIBOR-indexed contracts but strongly supported efforts to limit the use of LIBOR in new contracts. The FCA will consider use of its authority to prohibit some or all new use of LIBOR by supervised entities in the UK, though it states that it does not expect to use this authority before the end of 2021 (if it uses this authority at all).
In the United States, the Fed, OCC and FDIC issued a statement encouraging banks to transition away from LIBOR as soon as possible. Much like the FCA notice, this statement bifurcates new and legacy contracts–noting that the extended timeline for most USD LIBOR tenors will allow many legacy contracts to mature before publication of LIBOR ceases, while also noting that banks entering into new contracts that use LIBOR as a reference rate after December 31, 2021 “would create safety and soundness risks” and that the agencies “will examine bank practices accordingly.” The statement provides limited exceptions, largely related to hedging and market making.
Taking these statements together, it appears that regulators in the United States and the UK see benefit from continued publication of most USD LIBOR tenors to help facilitate a smooth transition for existing LIBOR-indexed contracts…but will take a harsh view of institutions entering into new contracts that reference USD LIBOR (and any such contracts should include robust fallback language).
Please note that these announcements do not alter the timelines that have been put forth by other entities, such as Fannie Mae, Freddie Mac and Ginnie Mae, regarding their acceptance of LIBOR-indexed products.
- Fed/OCC/FDIC Updates on Appropriate Alternatives to LIBOR: On November 6, the Fed, OCC and FDIC issued a notice clarifying that they are not endorsing a specific alternative reference rate to replace LIBOR for use by banks. As a reminder, while the ARRC has identified SOFR as its preferred replacement for USD LIBOR, the U.S. banking regulators have not mandated the use of SOFR as the replacement for LIBOR. They state very clearly in the notice that the use of SOFR is voluntary and that banks may determine that credit-sensitive alternatives to LIBOR may be appropriate in certain situations. The notice does, however, reiterate that banks should be including robust fallback language in any new contracts.
- Potential Legislation to Address Legacy Contracts: Additional work continues to advance legislation that would help financial institutions address legacy LIBOR-indexed contracts that do not have adequate fallback language. As a reminder, the ARRC proposed legislation for New York State to minimize legal uncertainty in these situations. While we won’t re-hash the entire draft legislation here, we did want to note that a few Congressional offices are working on this legislation with an eye towards a potential introduction of a bill at the federal level. There is lots more work to be done on this front, but the conversation is progressing and attracting bipartisan interest.
We remain engaged with the ARRC and the various regulators on these developments. As always, let us know if you have any questions or thoughts.