Global Financial Institutions Coverage

SS LIBOR Brochure 20201222

Shearman & Sterling LLP

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2 5 The ICE Benchmark Administration ("IBA"), LIBOR's administrator, and the UK and US banking regulators have recently put forth the clearest, most practical framework to date on the end of LIBOR. On November 30, 2020, IBA announced a proposal to extend the publication of the most commonly used USD LIBOR settings (overnight and one-, three-, six- and 12-month) until June 30, 2023, with the other settings (one-week and two-month) ceasing after December 31, 2021. IBA's announcement followed an earlier statement in which it announced plans to cease publication of all GBP, EUR, CHF, and JPY LIBOR setting after December 31, 2021. In connection with IBA's announcement on November 30, the UK Financial Conduct Authority (FCA) and the US Federal Reserve Board issued statements welcoming IBA's announcement, which the FCA described as "incentivis[ing] swift transition, while allowing time to address a significant proportion of the legacy contracts that reference [USD LIBOR]." According to recent comments by an FCA official, the FCA believes it is possible to maintain a representative USD LIBOR until June 30, 2023, and it would not have supported IBA's proposed extension unless it was confident that representativeness thresholds could be maintained in terms of the number of panel banks. Therefore, the FCA regards an extension as effectively eliminating the risk of so-called "zombie LIBOR" in any currency. Concurrently with IBA's latest announcement, the US banking agencies issued a joint statement encouraging 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." The agencies described this as necessary to facilitate an orderly—and safe and sound—LIBOR transition. In particular, "[g]iven consumer protection, litigation, and reputation risks, the agencies believe entering into new contracts that use USD LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and will examine bank practices accordingly." The joint statement clarified that is not to be read as announcing that the LIBOR benchmark December 31, 2021 – Stop using USD LIBOR for new contracts and instruments by this date or earlier if practicable. June 30, 2023 – Legacy contracts that reference USD LIBOR should have matured, been refinanced, or otherwise been remediated by this date. Right Now – All new contracts and instruments that reference USD LIBOR should include hardwired fallbacks now. has ceased, or will cease, to be provided permanently or indefinitely or that it is not, or no longer will be, representative for the purposes of language adopted by ISDA. For its part, ISDA similarly clarified that it does not view the statements as constituting an "index cessation event" or triggering fallbacks. The ARRC has described these recent announcements as being fully aligned with its own work to date. It has also noted that the timelines contained in its recommended best practices were designed on the basis of what it considered to be practicable. Therefore, the following take-aways should be considered by market participants: • New contracts and instruments should stop referencing USD LIBOR by December 31, 2021, but earlier if practicable. Otherwise, examiners may determine that a bank is engaging in unsafe and unsound banking practices. • Legacy contracts (i.e., those that mature beyond December 31, 2021) that reference USD LIBOR may have an additional 18 months—until June 30, 2023—to mature, be refinanced, or otherwise be remediated, including through a legislative fix, if one were to be enacted. For planning purposes, it should be assumed that IBA's proposal is adopted after the consultation for feedback closes in January 2021 and subsequently adopted. • New contracts and instruments that reference USD LIBOR should include hardwired fallbacks now. The recent announcements, which have been received positively by financial and banking trade associations, signify an important shift from what had been viewed as an inflexible deadline of year-end 2021. With the extra time to prepare, market participants should continue taking actionable steps to operationalize remediation processes in a thoughtful and thorough manner.

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