LIBOR transition and contractual fallbacks
Speech by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, delivered at the International Swaps and Derivatives Association (ISDA) Annual Legal Forum.
- On a monthly basis, cleared notional in Sterling Overnight Index Average (SONIA) swaps is now higher than that for sterling London Inter-bank Offered Rate (LIBOR).
- The best and smoothest transition from LIBOR will be one in which contracts that reference LIBOR are replaced or amended before fallback provisions are triggered.
- Market participants should not rely on the availability of an option to use Libor for legacy contracts.
The subject I will address today is what the final steps in transition away from the London Inter-bank Offered Rate (LIBOR) might look like. This is, of course, directly relevant to many of the key legal documents that underpin the global derivatives market.
There is now wide recognition that LIBOR will come to an end. Thanks to the agreement reached with 20 panel banks to continue submitting until end 2021, LIBOR is not expected to cease before that point. But, when I spoke at the International Swaps and Derivatives Association’s (ISDA’s) annual Europe conference in September last year, on this same stage, an audience poll found just over 50% thought LIBOR would stop before end-2022. Today, I would like to explore in a bit more detail not whether LIBOR will end, but how it will end.
This has important implications for contractual design. It is relevant in particular to how ’fallback‘ language in outstanding contracts that continue to reference LIBOR will and should work. Understanding the way in which the end of LIBOR will play out is key to choosing the right trigger point for moving to a new or replacement ‘fallback‘ rate.
The full speech is available at https://www.fca.org.uk/news/speeches/libor-transition-and-contractual-fallbacks