It's Still the Final Countdown for LIBOR

On November 30, financial regulators announced revised timelines for the expiration of LIBOR for legacy contracts. Meanwhile, December 2021 remains the deadline for banks to stop issuing new LIBOR-based contracts. Given these developments, what should firms saddled with legacy, tough legacy and non-legacy contracts do?


14 December 2020

LIBOR TRANSITION

Recent announcements in the banking industry’s move away from the London Inter-bank Offered Rate (LIBOR) may have brought both relief and confusion to market participants exposed to LIBOR-based loans and investments:

  • Key regulators and supervisors (ICE Benchmark Administration, Financial Conduct Authority, etc.) consideration of USD LIBOR to “be published on a representative basis” until June 2023 for legacy LIBOR contracts. This means that LIBOR-based contracts will be allowed to mature through June 2023. While considered as a reprieve for many, there is still a significant population of contracts exposed to LIBOR that mature beyond that extended deadline, and many are considered “tough legacy” — without adequate fallbacks and therefore no backstop plan. “Tough legacy” affects some of the most common debt instruments, such as U.S. bonds which require bondholder consent before any changes can be enforced.
  • U.S. banking regulators (Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC)) announced that financial institutions can select any reference rate — Secured Overnight Financing Rate (SOFR), Ameribor or other — to replace LIBOR.

These developments point to regulators’ insistence on moving away from LIBOR as soon as possible. It also acknowledges the challenges faced by banks and other financial institutions currently dealing with COVID-19 fallout, who are trying to figure out a way to resolve USD 38 trillion of legacy LIBOR exposures.

What’s important to note is that December 31, 2021 remains the deadline to stop using LIBOR in new contracts. Despite an extension for legacy LIBOR, banks must no longer issue loans or debt based on that benchmark, and they must address the legacy contracts that mature after June 2023.

In terms of magnitude, that is the case for roughly 75 percent of syndicated loans. The 25 percent that are “exempt” from the December 2021 deadline because they mature by June 2023 should still be identified to ensure they don’t fly under the radar.

The bottom line

The global financial services industry is still set to say farewell to LIBOR at the end of 2021. The clock is still ticking and lagging financial institutions can’t afford to ignore the inevitable any longer. If not attended to right now, these firms could face regulatory fines, litigation, negative press, reputational damage and loss of business.

However, all is not lost for financial institutions that haven’t completely resolved LIBOR-exposed contracts. These firms can leverage solutions that combine secure file-sharing, artificial intelligence (AI), legal expertise, robust document analysis and workflow.

To help financial institutions transition away from LIBOR, SS&C Intralinks recently published 5 Tips for Leaving LIBOR Behind in 2021. The informative white paper contains a planning framework to help firms efficiently and methodically identify affected contracts, analyze documents and plug in changes and fallbacks, establish audit trails and compliance reporting, and streamline stakeholder communications for adoption and approvals. Download this important white paper here to learn more about how to address LIBOR exposures as efficiently as possible.



Patricia Gatmaitan

Patricia Gatmaitan

Patricia is director of product marketing for banking and securities at Intralinks, responsible for content and go-to-market strategy for the debt capital markets business. Prior to joining Intralinks in 2019, Patricia held senior product marketing and communications roles at global financial services firms including Envestnet, IHS Markit, and Morgan Stanley.