Today, in a clear statement of the importance of demonstrable LIBOR transition efforts, the federal banking agencies (Agencies - FRB, OCC, FDIC) issued a statement encouraging their supervised institutions to transition away from USD LIBOR as soon as practicable, and in any event by December 31, 2021 in order to promote an orderly, and safe and sound, LIBOR transition. New contracts entered into before December 31, 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 Agencies’ statement responds to a November 30, 2020 announcement from the LIBOR administrator, ICE Benchmark Administration Limited, indicating that it expects to consult “in early December” on a proposed plan to cease the publication of USD LIBOR as follows:
- One week and two months settings immediately following the LIBOR publication on December 31, 2021
- All other settings (overnight and one, three, six, and twelve months) immediately following the LIBOR publication on June 30, 2023.
If, after the consultation, the LIBOR administrator extends the publication of USD LIBOR beyond December 31, 2021, the Agencies acknowledge there may be limited circumstances when it would be appropriate for an entity to enter into new USD LIBOR contracts after December 31, 2021, such as:
- Transactions executed for purposes of required participation in a central counterparty auction procedure in the case of a member default, including transactions to hedge the resulting USD LIBOR exposure
- Market making in support of client activity related to USD LIBOR transactions executed before January 1, 2022
- Transactions that reduce or hedge the bank’s, or any client of the bank’s, USD LIBOR exposure on contracts entered into before January 1, 2022
- Novations of USD LIBOR transactions executed before January 1, 2022.
Statements in support of the developments were released by the LIBOR regulator (the UK Financial Conduct Authority), the U.S. SEC, and the Alternative Reference Rates Committee (ARRC).
The LIBOR administrator previously announced on November 18, 2020 that it expected to propose cessation of the publication of all settings for GBP LIBOR, EUR LIBOR, CHF LIBOR, and JPY LIBOR immediately following the LIBOR publication on December 31, 2021.