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Life after LIBOR
By Marc Gottridge
Last year, the FCA announced that it will neither compel nor seek to persuade banks to make LIBOR submissions beyond 2021 – and warned that market participants “must take responsibility for their individual transition plans” over the next 4 years.
That will be no small task. Instruments with an estimated aggregate notional value of US$350tn incorporate LIBOR. These include swaps and other OTC derivatives, exchange-traded derivatives, all manner of bonds and other securities, bilateral and syndicated commercial loans, consumer loans and mortgages.
2018 will be a busy year as the transition away from LIBOR gets underway. “Risk-free” overnight rates – the reformed SONIA and the new SOFR – are being launched by the Bank of England and the Federal Reserve, respectively. But these will differ significantly from LIBOR, as they do not reflect term or credit risk. Industry groups are already working on developing robust fall-backs and substitutes for use after LIBOR is no longer available. In the interim new transactions will need to include fallback language to deal with discontinuance and, particularly with traded securities, provisions to allow an expedited approval process for substitution of LIBOR references in due course.
Financial institutions have begun to review legacy contracts, and will seek to amend them where necessary. That is important: Legacy contracts lacking workable fall-back provisions may not be enforceable after LIBOR’s demise, and it would be a mistake to assume that courts will salvage them.
