Today, Friday 30 June 2023, is a momentous day in financial markets, being the last day on which rates based on the London Interbank Offered Rates (LIBORs) will be published. LIBOR is a key reference rate that has underpinned hundreds of trillions of dollars of assets over the last five decades.
Leaving its legacy
The title of this post is somewhat misleading as LIBOR will continue to be referenced in "tough legacy" contracts, contracts which cannot be amended for various reasons to remove references to LIBOR. However, there are several contractual and legislative mechanisms in place to remedy the absence of LIBOR in these contexts, including: synthetic USD LIBOR, the US Adjustable Interest Rate (LIBOR) Act and the ISDA IBOR Fallbacks Protocol/Definitions.
Synthetic one, three and six-month USD LIBORs will be available until 30 September 2024 in the same place and at the same times as the original USD LIBORs (i.e. published by ICE Benchmark Administration Limited and available on Bloomberg) but will be based on different data, i.e. term SOFR rates together with fixed credit spread adjustments. Synthetic LIBOR cannot be used for new products.
Check your currency
In the market for USD loans, term SOFR (as opposed to e.g. compounded (overnight) SOFR) is proving the most popular replacement rate for USD LIBOR. Some regulators are apprehensive about the widespread use of Term SOFR and would prefer more transactions to be based on overnight SOFR wherever possible.
There are no current plans to discontinue EURIBOR (the Euro interbank offered rate), but European regulators have recently reiterated their guidance that parties should ensure that their EURIBOR-based contracts include robust fallbacks incase of discontinuance of EURIBOR.
Big bang or little limp?
What happens on Monday where contracts continue to reference LIBOR? Cleared transactions will update in accordance with exchange rules. In OTC markets, in most cases, parties will have adhered to the ISDA IBOR Fallbacks Protocol or included relevant definitions and references to USD LIBOR will automatically change to SOFR plus a fixed credit spread adjustment. Note that synthetic LIBOR is based on Term SOFR plus the applicable ISDA fixed credit spread adjustment – so there is potential for cash/derivative basis mis-match. More than 16,100 parties from 92 countries have now adhered to the protocol, highlighting the widespread recognition of the importance of fallbacks.
Originally published 30 June 2023
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