Stay of Execution Proposed for USD LIBOR

ICE Benchmark Administration Limited ("IBA") upends market expectations by announcing a consultation on an 18-month extension for most tenors of USD LIBOR.

IBA announced on November 30, 2020, that it would launch a market consultation on the extension of U.S. dollar LIBOR through June 30, 2023, (with the exception of the little-used one-week and two-month tenors, which are proposed to cease publication on December 31, 2021, as previously expected). Of equal importance, the U.K. Financial Conduct Authority ("FCA"), the Federal Reserve Board and the Alternative Reference Rates Committee all issued near-simultaneous public expressions of support for the extension, coupled with a strong "safety and soundness" admonition for banks to cease entering new LIBOR contracts no later than the end of 2021, and to start using robust fallbacks clearly defining an alternative reference rate as soon as practicable. The IBA and FCA announcements additionally contain oblique references to panel banks having agreed to support the approach.

The IBA announcement represents a massive sea change in the LIBOR transition process, under which all LIBOR publication had been anticipated to cease at the end of 2021. It follows closely on the heels of recent IBA and FCA announcements regarding market consultations concerning LIBOR for other currencies, which were consistent with market expectations but expressly left open plans for USD LIBOR. It also starts to bring to fruition recent congressional testimony by Vice Chair for Supervision Randal Quarles suggesting the development of a "mechanism" for USD LIBOR legacy contracts to continue to reference LIBOR without the need for amendment or other orderly transition to a non-LIBOR rate before they expire.

The IBA announcement warrants a few words of caution. First, while 2021 may no longer see the need for nearly all legacy LIBOR contracts to be amended simultaneously, it still will be a year in which lenders and borrowers find themselves grappling with how to incorporate so-called "hardwired" fallback language into legacy deals that the parties wish to roll forward beyond June 2023. Second, the proposed extension also does not do much for the vast majority of "tough legacy" and other contracts that mature after mid-2023. Third, its impact on proposed legislative "solutions" to LIBOR's demise is unknown. Fourth, the continued availability of LIBOR through mid-2023 will inevitably have an impact on the evolution of an IOSCO-compliant "term SOFR." Fifth, the extension is not, strictly speaking, a "done deal" as IBA's consultation extends through the end of January 2021, and the IBA announcement specifically provides that it is not an announcement that IBA has ceased or will cease the publication of any tenors of LIBOR.

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