In July 2017 Andrew Bailey, Chief Executive of the UK Financial Conduct Authority gave a speech referring to the difficulty of sustaining the LIBOR benchmark. He said that market participants should not rely on LIBOR being available after the end of 2021. He advocated a planned transition to alternative reference rates that would be based firmly on transactions.
More recently in July 2018, he gave a further speech. This highlighted amongst other things why risk free rates (RFRs) would be the right foundation for interest rate markets and the progress made by the various trade associations and working groups on finding alternatives to LIBOR.
This planned transition from LIBOR to alternative RFRs has widespread implications, not least for banks and other financial institutions and their borrowers. LIBOR is used as a benchmark in a wide variety of financing products such as loans, bonds and derivatives. It is also used in a variety of other contracts dealing with commercial and other transactions.
As well as working out new provisions referring to whatever new RFRs are developed in new documents, there will also be the need to deal with the position with regard to existing documents which will continue to be in effect after 2021.
Working groups have been established in the various LIBOR currency jurisdictions and progress is being made. Regulators and trade associations are also actively involved.
Sources of information:
Here in the UK, both the Association of Corporate Treasurers (www.treasurers.org/liborreform) and the Loan Market Association (www.lma.eu.com/libor) have LIBOR microsites, whilst there is information on the websites of other trade associations such as ISDA and on the websites of the Bank of England and the Financial Conduct Authority.
Effect on documents:
Whilst progress is being made and, for example, the LMA is working on new language for its standard documents, there is still a lot to be done. If you want to find out more about the developments in this area please email your usual contact at DMH Stallard or email Gwen Godfrey here (firstname.lastname@example.org).