Client Alert

A Delay of LIBOR’s Demise?

02 Dec 2020

Publication of U.S. dollar (USD) LIBOR rates used in many financial instruments may continue longer than expected. On November 30, 2020, ICE Benchmark Administration (IBA), the administrator of LIBOR, released a statement implying that it may continue publication of overnight and one-, three-, six-, and twelve-month USD LIBOR through June 30, 2023. If this proposal were adopted, it would serve as an 18-month extension of publication of these USD LIBOR rates past the previously expected December 31, 2021 termination date. However, IBA’s statement indicates that it continues to expect to cease publication of one-week and two-month USD LIBOR after December 31, 2021. These dates are not final, as IBA commenced a consultation period to determine the final dates. The November 30 statement comes on the heels of IBA’s statement on November 18 that it will commence a similar consultation period with respect to its intention to cease publication of all tenors of sterling, euro, Swiss franc, and yen LIBOR after December 31, 2021.

Although this announcement may serve as a reprieve for many financial institutions that had been frantically preparing for a transition away from USD LIBOR, the announcement was quickly followed by a press release from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency warning against “entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021.” The agencies indicated that they favorably view the USD LIBOR publication extension as a means to lessen disruption for the LIBOR transition, as they expect most legacy financial instruments that use USD LIBOR interest rate benchmarks to mature prior to the LIBOR transition.  However, the agencies warned that regulated financial institutions entering into most USD LIBOR contracts after December 31, 2021, would potentially “create safety and soundness risks” and noted that they “will examine bank practices accordingly.” The agencies concluded that:

The LIBOR transition is a significant event that poses complex challenges for banks and the financial system. The agencies encourage banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, in order to facilitate an orderly—and safe and sound—LIBOR transition.

We will continue to monitor the situation and provide a further update once IBA makes its announcement at the conclusion of the consultation period, which it expects to close by the end of January 2021.

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