The UK Financial Conduct Authority (FCA) recently announced the results of its November 2022 consultation on synthetic USD LIBOR. In line with the FCA consultation, USD LIBOR will continue to be published by the ICE benchmark administrator until September 30, 2024. The synthetic USD LIBOR rate, however, will not be calculated based on a dealer poll as has been done prior to June 30, 2023. Instead, USD LIBOR will reflect CME term SOFR plus the standard ISDA spread adjustment. In the following Q&A, Of Counsel Scott Diamond discusses the transition from LIBOR to SOFR.
On April 3, 2023, the FCA announced the results of its November 2022 consultation on synthetic USD LIBOR. In line with the FCA consultation, USD LIBOR will continue to be published by the ICE benchmark administrator until September 30, 2024. The synthetic USD LIBOR rate, however, will not be calculated based on a dealer poll, as has been done prior to June 30, 2023. Instead, USD LIBOR will reflect CME term SOFR plus the standard ISDA spread adjustment.
Below, Of Counsel Scott Diamond answers frequently asked questions regarding the LIBOR to SOFR transition.
Why extend publication of USD LIBOR at all?
The FCA extended publication of USD LIBOR because foreign law contracts would not be subject to the U.S. LIBOR Act, which converts remaining tough legacy contracts to SOFR on June 30, 2023. Those foreign law contracts need more time to transition.
Which U.S. law contracts will avail themselves of synthetic USD LIBOR?
Contracts that fall back to the base rate, which may be prime or another non-LIBOR rate, may continue to look at synthetic LIBOR.
Which base rate fallback contracts will not rely on synthetic USD LIBOR?
Those U.S. law contracts that fallback to the base rate when USD LIBOR is no longer representative will not shift to synthetic USD LIBOR. Those U.S. law contracts that shift to base rate when USD LIBOR is no longer available may look to synthetic LIBOR after June 30, 2023.
For U.S. law contracts that fall back to base rate, is it better to rely on synthetic USD LIBOR instead of transitioning to the base rate?
Probably, but it may be best to transition to a negotiated SOFR rate. Synthetic USD LIBOR is most likely a better rate than anything based on the prime rate, but synthetic USD LIBOR will incorporate standard ISDA spread adjustments of 11 and 26 basis points for 1- to 3-month tenors. Borrowers may be able to reduce that spread adjustment through negotiation.
When we look at the ICE or Refinitiv screen for USD LIBOR after June 30, 2023, will it look different since it is in fact a different rate?
We do not think so. Based on reports from ICE and Refinitiv, synthetic USD LIBOR will not be prima facie distinguishable from dealer poll USD LIBOR.
What happens after September 30, 2024?
It is unknown, as the FCA notes that “we will review our decision” at that time, but it is clear that the FCA expects firms to “continue to actively transition contracts that reference US dollar LIBOR”.
Can new contracts reference synthetic LIBOR?
The FCA is attempting to limit new use of synthetic USD LIBOR, and it is expected that the U.S. banking regulators will also make efforts to restrict its use. It remains unclear, however, how this would prevent unregulated parties from using the synthetic USD LIBOR index in new contracts.
What is happening to the 12-month LIBOR rate?
It is being terminated entirely on June 30, 2023, and will no longer be published, including synthetically. The 12-month tenor is infrequently used in loans as very few USD loans have a one-year interest payment period.
For further questions about the transition from LIBOR to SOFR, please contact Scott Diamond of Ballard Spahr.
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