In this article, we will cover the questions most frequently asked by our clients on LIBOR transition.
What is happening with the LIBOR rate?
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-month and 12-month sterling LIBOR settings and the 1-week and 2-month US dollar LIBOR settings will cease immediately after 31 December 2021. The overnight and 12-month US dollar LIBOR settings will cease by 30 June 2023.
It is unlikely that the changes will impact prior to this date however, from the above dates, these rates will no longer be available, meaning clients are transitioning already.
How will this impact me?
Balance sheet exposure - you will need to move all stock of LIBOR linked contracts to alternative risk-free rates.
How can I prepare?
Businesses need to conduct an end-to-end inventory of LIBOR exposure, covering the full range of systems and processes including valuation, booking, risk management, pricing, clients, employees, suppliers and more. This inventory may also include additional systems where third-parties provide systems, businesses should ensure timely software upgrades are carried out to use alternative rates.
The FCA also state that "where you identify LIBOR transition will affect the finances and product choices available to your clients or require a contract amendment or renegotiation, we expect firms to treat clients fairly and to communicate with them in a clear and timely manner. As part of this communication you should:
- take care in describing to the customer the risks associated with LIBOR ending and how it will affect them
- be aware that there is a risk that some customers may not fully understand the implications."
What will replace LIBOR?
Most regulators and market participants agree that LIBOR needs to be replaced with 'risk free rates', which cannot be manipulated by the financial institutions. However, there is no harmonised approach to the replacement of each LIBOR rate and the regulators and other bodies have come up with their own 'risk free rate' and how it would be monitored.
Global risk free rates include:
- US: SOFR Secured Overnight Funding Rate
- EURO: ESTER European Short-Term Euro Rate
- Japan: TONAR Tokyo Overnight Average Rate
- Switzerland: SARON Swiss Average Rate Overnight
- UK: SONIA Sterling Overnight Index Average
What are the challenges?
Some LIBOR contracts will be particularly challenging to amend before the deadlines therefore the FCA is taking steps to help reduce the impact by implementing legislation under the Benchmarks Regulation (BMR) to facilitate exceptional circumstances where some sterling LIBOR settings can continue for a period of time, as with Japan and the US. The FCA will share further details of this shortly and it has already been made clear this will be for historic contracts only.
How can we help?
We offer one-stop, cost-effective, efficient and streamlined solution to LIBOR transition:
- Transactional lawyers that understand and can draft and negotiate amendments in myriad types of documentation (conventional and Islamic finance, derivatives and capital markets).
- AI led and human controlled solution that can be used to analyse hundreds of non-complex financing and derivative documents to identify and update the language, and integrate it with human quality checks to help financial institutions and in-house lawyers.
- Negotiate and draft bespoke agreements on complex transaction documentation.
- Assist in any disputes arising from LIBOR transition.