The UK Financial Conduct Authority (FCA), the UK regulator responsible, broadly, for market conduct made an announcement (the FCA LIBOR Announcement) on 5 March 2021, on the future cessation or loss of representativeness of all (35) LIBOR benchmarks.
Depending on the “LIBOR Setting”, this will take place immediately after 31 December 2021 or, for five USD Libor Settings, 30 June 2023. For the finer details on this, you may be interested in our recent post on our Eye on IBOR Transition blog.
But what does the FCA LIBOR Announcement mean for the over 13,500 adherents to the ISDA 2020 IBOR Fallbacks Protocol (the Fallbacks Protocol) and its fallbacks supplement (the Fallbacks Supplement)? What does it mean for the counterparties using bilateral amendment agreements which incorporate the Fallbacks Protocol and Fallbacks Supplement? What does it mean for those counterparties that have entered into new derivatives arrangements, from 25 January 2021, incorporating the 2006 ISDA Definitions, which since then now includes the Fallbacks Supplement as its ‘freshly minted’ Supplement 70?
To help answer those questions, following the FCA LIBOR Announcement, ISDA published guidance (the Guidance) for OTC derivatives. The stated intention of the Guidance is to facilitate consistent application of the relevant triggers and mitigate market risk. We recommend reading it alongside this helpful factsheet on IBOR fallbacks published by Bloomberg, and available here.
The Guidance confirms the following key points:
- Index Cessation Event: an Index Cessation Event occurred on 5 March 2021 for all thirty-five LIBOR Settings.
- Last Day of Publication/Representativeness and Index Cessation Effective Date:
- CHF LIBOR, EUR LIBOR, GBP LIBOR, JPY LIBOR, USD LIBOR (1 Week and 2 Months only) Settings
- Last day of publication/representativeness: 31 December 2021; and
- Index Cessation Effective Date: first London Banking Day on or after 1 January 2022.
- USD LIBOR (Overnight, 1 month, 3months, 6 months , 12 months) Settings
- Last day of publication/representativeness: 30 June 2023; and
- Index Cessation Effective Date: first London Banking Day on or after 1 July 2023.
- USD LIBOR (1 week and 2 months) Settings : (see also bullet immediately below)
- Last day of publication/representativeness: 31 December 2021; and
- Index Cessation Effective Date: first London Banking Day on or after 1 July 2023.
- CHF LIBOR, EUR LIBOR, GBP LIBOR, JPY LIBOR, USD LIBOR (1 Week and 2 Months only) Settings
- 1 Week, 2 Month USD LIBOR Settings: with a shorter and longer USD LIBOR tenor (both non-representative) available either side of each of these LIBOR Settings between 31 December 2021 and 30 June 2023, the rate for these LIBOR Settings will be determined by interpolating such shorter and longer tenors.
- Spread Adjustments: the “Fallback Rates” in the Fallbacks Supplement are crystallised when an Index Cessation Event occurs. This is because the Fallback Rates are “all in fallback rates” for each LIBOR Setting, and comprise a combination of an Adjusted Risk Free Rate/RFR (on the basis of daily compounded setting in arrears) and its “Spread Adjustment”.The Spread Adjustment is fixed on the “Spread Adjustment Fixing Date”.
The Guidance confirms that the date of the FCA LIBOR Announcement is a Spread Adjustment Fixing Date, because it is an Index Cessation Event for all LIBOR Settings, and therefore fixes the Spread Adjustment.
Even though the Spread Adjustment is now fixed, the Fallback Rates do not apply under the Fallbacks Supplement for a LIBOR Setting until the relevant “Reset Date” following the Index Cessation Effective Date (highlighted above) for such LIBOR Setting. Bloomberg have also now published details of the individual Spread Adjustments. You can see it here. The Spread Adjustment for the GBP 12 Months LIBOR Setting is 0.4664, for example.
The transition from IBORs to RFRs is picking up speed. The FCA LIBOR Announcement, and ISDA’s Guidance, provides market participants with certainty on the timing of IBOR discontinuance, and the Spread Adjustments which will apply when LIBOR Settings are discontinued. The FCA should be applauded for providing market participants with plentiful advance notice of the cessations. Please do contact us for help with any IBOR transition related queries.