LIBOR

The London Interbank Offered Rate (LIBOR) is a series of interest rates based on the rates at which banks lend to each other. LIBOR is one of the main interest rate benchmarks used in financial markets throughout the world, and determines interest rates for contracts around the world. 

LIBOR is commonly referenced in both financial contracts, such as loans or deposit facilities, and non-financial contracts such as commercial leasing contracts and the discount rate for valuations. 

In 2017, the FCA announced plans to stop compelling banks to submit to LIBOR by the end of 2021. Since then, regulators and market participants around the world have come together to develop comprehensive plans to transition away from all possible use cases of LIBOR. We are near the end of this enormous task, but due to difficulties in transitioning certain instruments, the transition process will continue beyond the year-end deadline.

Since the 2008/2009 Global Financial Crisis, there has been a significant reduction in the number of LIBOR’s underlying transactions. This low volume means LIBOR is no longer sustainable. As a result, regulators announced that most LIBOR settings will cease to be published at the end of 2021.

Transition from LIBOR
From the end of 2021 LIBOR will be phased out by jurisdictions around the world - from this point there should be no further issuance in the UK of LIBOR-linked instruments and all outstanding LIBOR-linked securities should have been transitioned to a new rate.

All LIBOR settings will cease to be provided by any administrator or no longer be representative:

• Immediately after December 31 2021 in the case of all GBP, EUR, CHF and JPY settings, and the 1-week and 2-month USD settings; and

• Immediately after June 30, 2023 in the case of the remaining USD settings.

Outstanding LIBOR instruments

It may not be possible to transition all legacy contracts to alternative rates prior to the cessation of LIBOR on 31 December 2021. In order to avoid disruption to legacy contracts that reference the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings, the FCA will require the LIBOR benchmark administrator to publish these settings under a ‘synthetic’ methodology, based on term risk-free rates, for the duration of 2022.

The methodology for calculating these ‘synthetic’ rates will be as follows:

• Forward-looking term versions of the relevant risk-free rate; plus
• The respective ISDA fixed spread adjustment.

Synthetic LIBOR will be available for use only in some legacy contracts, and is not permitted for use with new contracts. At least for the duration of 2022 the FCA will permit legacy use of synthetic sterling and Japanese yen LIBOR in all contracts except cleared derivatives.

The FCA has emphasised that users of LIBOR should continue to focus on active transition rather than rely on synthetic LIBOR. Synthetic LIBOR will not be published indefinitely and will be subject to annual review, with no planned renewal for the Japanese yen settings which must therefore cease publication at end-2022. The FCA may if necessary look to further restrict permission to use synthetic LIBOR in order to maintain progress towards an orderly cessation.

LIBOR Buy-Side Information Sheet: A Guide for Investment Management Firms

Click to read LIBOR Buy-Side Information Sheet