LIBOR is an interest rate benchmark which is being phased out. From 1 January 2022, publication of most LIBOR settings ended. Five USD LIBOR settings are available until end-June 2023 although no new loan facilities should be using USD LIBOR. Work is progressing on the transition of legacy LIBOR facilities to alternative near risk-free rates in USD and other currencies. The LMA is working with the market, other trade associations and the regulators on the transition.
Countdown to cessation of remaining US dollar LIBOR panels
(overnight, 1-month, 3-month, 6-month & 12-month US dollar LIBOR)
On 5 January 2023, the LMA submitted its response to the UK Financial Conduct Authority (FCA) public consultation on 'synthetic' US dollar LIBOR.
Responses to the consultation will inform the FCA on its proposal to continue the publication of the 1-, 3- and 6-month synthetic US dollar LIBOR settings until end-September 2024, after which they would permanently be discontinued. The FCA also sought feedback on its proposals to: (i) use CME Term SOFR plus the relevant ISDA fixed spread adjustment as the methodology for a synthetic USD LIBOR; and (ii) permit all legacy contracts other than cleared derivatives to use a synthetic USD LIBOR.
The consultation closes on 6 January 2023. Results are expected to be announced in late Q1/early Q2.
We would like to remind our members that any synthetic LIBOR settings are only a temporary solution to appropriate alternative risk-free rates. As such, market participants should continue to prioritise active transition and focus on converting their legacy contracts to risk-free rates as soon as possible.
FSB publishes report on the progress of IBOR transition and encourages transition to robust reference rates
On 16 December 2022, the Financial Stability Board (FSB) released a progress report on the transition from LIBOR and other benchmarks, encouraging market participants to switch to robust reference rates.
While significant progress has been made, the report notes that there may be some residual risk arising from relatively low awareness among users of US dollar LIBOR in jurisdictions where LIBOR exposure is low. Market participants should take active steps to address existing legacy contracts in preparation for the end of the remaining US dollar LIBOR settings.
Looking towards the future, the FSB stresses the necessity for the financial system to be anchored in robust reference rates that are supported by liquid markets. As such, the FSB encourages market participants to use the most robust reference rates to achieve the intended benefits of market stability and integrity and avoid the need to repeat this transition exercise.
LMA publishes new and updated exposure draft term SOFR documentation for investment grade and developing markets
On 12 October 2022, the LMA has published a new exposure draft multicurrency term and revolving facilities agreement incorporating term SOFR (the IG Term SOFR Exposure Draft). The IG Term SOFR Exposure Draft is based on the multicurrency RFR-referencing forms of the LMA Recommended Form of Facility Agreements with/without Observation Shift and, in particular, the multicurrency term and revolving facilities agreement with letter of credit with/without Observation Shift. The interest reference rate provisions reflect CME Term SOFR for loans in US dollars, compounded in arrear RFRs for sterling and Swiss francs, with EURIBOR for euros.
The LMA has also released an updated exposure draft single currency term and revolving facilities agreement incorporating Term SOFR for use in developing markets jurisdictions, alongside an updated commentary (the Term SOFR Commentary), to reflect the IG Term SOFR Exposure Draft.