ISDA® Issues Statement and Guidance on Future Cessation and Non-Representativeness of LIBOR | Practical Law

ISDA® Issues Statement and Guidance on Future Cessation and Non-Representativeness of LIBOR | Practical Law

ISDA has issued a statement and guidance in response to the FCA's announcement on the future cessation and loss of representativeness of LIBOR benchmarks.

ISDA® Issues Statement and Guidance on Future Cessation and Non-Representativeness of LIBOR

by Practical Law Finance
Published on 06 Mar 2021 • USA (National/Federal)
ISDA has issued a statement and guidance in response to the FCA's announcement on the future cessation and loss of representativeness of LIBOR benchmarks.
On March 5, 2021, ISDA® published:
  • A statement in response to the FCA's announcement setting out the dates on which all LIBOR settings will either cease to be provided by any administrator or no longer be representative (see ISDA Statement Regarding FCA IBOR Announcement). The fallback spread adjustment published by Bloomberg is therefore fixed as of this date for all euro, sterling, Swiss franc, US dollar, and yen LIBOR settings.
  • Guidance on the future cessation and loss of representativeness of the LIBOR benchmarks in order to help parties to over-the-counter (OTC) derivative transactions understand how the terms of the protocol and supplement apply to the FCA's announcement (see ISDA Guidance on Application of FCA Announcement).

ISDA Statement Regarding FCA IBOR Announcement

On March 5, 2021, the UK's Financial Conduct Authority issued an announcement of the dates that panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available (see Legal Update, FCA Statement on Future Cessation and Loss of Representativeness of LIBOR Benchmarks). As expected, the ISDA statement confirms that the FCA's announcement constitutes an "index cessation event" under the ISDA 2020 IBOR Fallbacks Supplement (supplement) and the ISDA 2020 IBOR Fallbacks Protocol (protocol) for all 35 LIBOR settings.
When such an index cessation event occurs under the supplement and protocol, the relevant IBOR in agreements that have been amended to incorporate the supplement or for which both parties have adhered to the protocol is replaced with a fallback rate equal to a risk-free rate (RFR) plus a fixed fallback spread adjustment. The ISDA statement sets March 5, 2021 the applicable "spread adjustment fixing date." For US dollar LIBOR, under the terms of the supplement, the fallback rate will be the term adjusted SOFR plus a fixed fallback spread adjustment based on the applicable LIBOR tenor. The fixed fallback spread adjustments were published by Bloomberg on March 5, 2021 and can be found here.
Fallbacks will automatically apply to outstanding derivatives contracts that incorporate the supplement or where both parties have adhered to the protocol on the following dates:
  • After December 31, 2021, for outstanding derivatives referencing all euro, sterling, Swiss franc and Japanese yen LIBOR settings.
  • After June 30, 2023, for outstanding derivatives referencing all US dollar LIBOR settings.
The ISDA statement also noted the following regarding the FCA announcement:
  • The FCA specifically announced that certain LIBOR settings (all seven euro and Swiss franc LIBOR tenors, overnight, one-week, two-month and 12-month sterling LIBOR, spot next, one-week, two-month and 12-month yen LIBOR, and one-week and two-month US dollar LIBOR) will permanently cease immediately after December 31, 2021. Publication of the overnight and 12-month US dollar LIBOR settings will permanently cease immediately after June 30, 2023.
  • The FCA further announced that it will consult on requiring ICE Benchmark Administration (IBA), the administrator of LIBOR, to continue publishing one-month, three-month, and six-month sterling LIBOR on a non-representative, synthetic basis for a further period after the end of 2021, and one-month, three-month, and six-month yen LIBOR on a non-representative, synthetic basis for an additional year after the end of 2021, under proposed new powers included in the Financial Services Bill.
  • The FCA will also consider whether to require IBA to continue publishing one-month, three-month, and six-month US dollar LIBOR on a non-representative, synthetic basis for a further period after the end of June 2023.

ISDA Guidance of Application of FCA Announcement

The purpose of the guidance is to describe how the terms of the following documents apply to the FCA announcement:
  • The supplement and the protocol. An index cessation event is an event that activates IBOR-to-RFR fallback provisions. An index cessation event was deemed to have occurred under the terms of the supplement and the protocol on March 5, 2021 when the FCA announced that all LIBOR settings will either permanently cease to be published or become non-representative (see Legal Update, FCA Statement on Future Cessation and Loss of Representativeness of LIBOR Benchmarks). The related index cessation effective date for each LIBOR setting will therefore occur on:
    • the first London banking day on or after January 1, 2022 for all seven euro, Swiss franc, yen, and sterling LIBOR settings.
    • the first London banking day on or after July 1, 2023 for all seven US dollar LIBOR settings.
  • Because US dollar LIBOR is a component in the calculation of the Singapore dollar Swap Offer Rate and the Thai Baht Interest Rate Fixing (Thailand's reference rate based on LIBOR), they will be impacted on or after the first London banking day on or after July 1, 2023.
  • The 2006 ISDA Definitions Benchmarks Annex to the 2018 ISDA Benchmarks Supplement. Because the LIBOR floating rate options referenced in transactions incorporating the terms of the 2018 ISDA Benchmarks Supplement reference an index cessation event, the 2018 ISDA Benchmarks Supplement definition of the term "priority fallback" will apply to relevant transactions. For more information on the 2018 ISDA Benchmarks Supplement, see Legal Update, ISDA Publishes Benchmarks Supplement.
The ISDA guidance covers euro LIBOR, sterling LIBOR, Swiss franc LIBOR, US dollar LIBOR, yen LIBOR, the Singapore dollar Swap Offer Rate, and the Thai Baht Interest Rate Fixing.
For more information on the IBOR Fallbacks Supplement and IBOR Fallbacks Protocol, see Practice Note, Practice Point: Understanding the ISDA 2021 IBOR Fallbacks Supplement and Protocol.
"ISDA" is a registered trademark of the International Swaps and Derivatives Association, Inc. (ISDA). ISDA is not a sponsor of Practical Law and had no part in the development of this Update.