Now that ICE Benchmark Administration (IBA) has announced that it would consult on its intention to cease publication of the one-week and two-month US Dollar LIBOR tenors immediately following the LIBOR publication on December 31, 2021 and for overnight, one-month, three-month, six-month and twelve-month USD LIBOR, immediately following their June 30, 2023 publications, the industry is now assessing how this impacts LIBOR transition.1 This follows the announcement on November 18, 2020, that IBA would consult on its intention to cease the publication of all GBP, EUR, CHF and JPY LIBOR settings immediately following the LIBOR publication on December 31, 2021.2 Proposed cessation dates would not be confirmed until after the market wide consultation.3The Federal Reserve Board, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency indicated that U.S. banks should stop writing new USD LIBOR contracts by the end of 2021. Also, any new LIBOR issuance in 2021 should either utilize a reference rate other than LIBOR or have robust fallback language that includes a clearly defined alternative reference rate after LIBOR’s discontinuation. The response by the US regulatory agencies to the request has also been to underscore the need to stop using LIBOR in all new products by the end of 2021.
IBA are currently running a consultation covering all LIBOR currencies and tenors. This is scheduled to close on the 25th January, following which, IBA plan to share the results with the Financial Conduct Authority (FCA) and publish a feedback statement summarizing responses. The exact timing is not known but it is expected around the end of January 2021. It is not clear yet if this publication would meet the definition of a “pre-cessation announcement”, as used in common contractual fallback language such as ISDA IBOR Supplement, or if a separate announcement would follow at a later stage by either the FCA or IBA.
The formal “pre-cessation announcement” is critical as it could lock in the Credit Adjustment Spread which could be used in contractual fallbacks following the permanent cessation and provides the solid timeline for transition which the market so desperately needs.
The extended timeline for 1M, 3M, 6M and 12M USD LIBOR would provide for some relief by defining a longer timeframe for tough legacy contracts to transition away from select USD LIBOR tenors products allowing these tough legacy contracts to expire by their own terms, actively transition clients away, or give more time for potential legislative relief. Although the IBA proposal can provide more time to implement some products or address technology issues, if not addressed, it could be considered a safety and soundness issue that could lead to potential further regulatory action. If accepted, this proposal would extend the deadlines for certain tenors, however there is still a high concentration of products across the industry that are not resolved by this proposal. While an analysis of impacted products should be performed, firms would need to continue to amend contracts and insert fallbacks for these in the event of a pre-cessation event. This includes, but is not limited to:
- deals that expire beyond 2023
- current facilities that clients could look to roll forward beyond 2023 (e.g., through renewals)
- anything with a tenor or rate not proposed to extend beyond 2023 (e.g., 1week/2month USD, GBP LIBOR)
Furthermore, your clients would still need to put in place capabilities to accept new ARR products and this may prompt further transition requests to exit LIBOR based products prior to the proposed new deadline, if agreed.
What should firms be focusing on now?
As the consultation is in progress, Accenture sees a number of actions firms can take now to stay on target for LIBOR transition.
- Firms should first review and categorize their exposures and form a contingency plan to assess exposures and product that would be subject to 12/31/2021 vs 6/30/2023 cessation dates.
- Sell side financial firms should stay focused on bringing to life new rate products. First mover banks who offer ARR products can provide their clients a means to transition away from LIBOR based instruments.
- Revaluate LIBOR transition planning. For example, IDSA’s new IBOR Supplement will not fallback to SOFR plus spread until June 2023 for derivatives transactions referencing 1 week or 2 month USD LIBOR. Additional operational considerations would be warranted as calculation agents would be required to continue to calculate via linear interpellation until June 2023.
- Back book activities for certain products should carry on.
- Continue to transition where requested by clients or for rates not impacted by the date extension. Some firms should continue to offer the ability to transition if approached by clients or as part of the normal business as usual activities.
- Transparent, consistent and appropriate communication with clients would continue to be important in mitigating conduct risk. Firms should continue a dialog with clients to keep them up to date on the transition and their options.
- Revisit longer term strategies. Consider the broader impacts to the industry to revisit longer term strategies for products and pricing opportunities.
Prepare for Regulatory Scrutiny
In the U.S., during regularly scheduled examinations and monitoring activities, the FFIEC (Federal Financial Institutions Examination Council) staff may ask regulated institutions about their planning for the LIBOR transition, including exposures and readiness. Also, the Securities and Exchange Commission (SEC) has stated that their 2020 Exam priorities OCIE would cover the industry’s transition away from LIBOR. The SEC has asked registrants about its LIBOR exposure and impact on advisory clients and investment vehicles, Investment Advisers efforts on outreach to service providers and vendors to assess and, models, advertising, IT testing and would systems be ready for the transition and identifying, managing and mitigating conflicts of interests. (see https://financialservicesblog.accenture.com/sec-issues-risk-alert-on-libor-preparedness).
1. Intercontinental Exchange – ICE Benchmark Administration to Consult on Its Intention to Cease the Publication of One Week and Two Month USD LIBOR Settings at End-December 2021, and the Remaining USD LIBOR Settings at End-June 2023 (theice.com)
2. Intercontinental Exchange – ICE Benchmark Administration to Consult On Its Intention to Cease the Publication of GBP, EUR, CHF and JPY LIBOR (theice.com)
3. ICE_LIBOR_Consultation_on_Potential_Cessation.pdf (theice.com)