Certain interest rate benchmarks are, or may in the future become, subject to ongoing international, national and other regulatory guidance, reform and proposals for reform.
Interest rate benchmarks that are currently the subject of proposals for reform include U.S. Dollar LIBOR, British Pound Sterling LIBOR, Swiss Franc LIBOR, Japanese Yen LIBOR, Euro LIBOR (the “LIBOR Rates”), Japanese Yen TIBOR, EURIBOR, Euro Yen TIBOR, Canadian Dollar CDOR, Hong Kong Dollar HIBOR and Australian Dollar BBSW (together with the LIBOR Rates, the “IBORS”). Regulators have signalled the need to use alternative benchmark reference rates and have emphasized the need to transition away from IBORs. As a result, existing benchmark rates may not comply with applicable laws and regulations (such as the European Benchmark Regulation) and may be permanently discontinued or the basis on which they are calculated may change.
On March 5, 2021, the U.K. Financial Conduct Authority (“FCA”) publicly announced that:
On September 29, 2021, the FCA published a notice compelling the continued publication of the 1-month, 3-month and 6-month Japanese Yen and British Pound Sterling LIBOR settings for a limited period after December 31, 2021, using a “synthetic” methodology (the “synthetic JPY and GBP LIBORs”).
On January 4, 2022, the FCA publicly confirmed the cessation of publication of the End 2021 IBORs.
On December 16, 2022, the Federal Reserve Board adopted the final rule that implements the Adjustable Interest Rate (LIBOR) Act by identifying benchmark rates based on SOFR (Secured Overnight Financing Rate) that will replace U.S. Dollar LIBOR in certain contracts after June 30, 2023.
On April 3, 2023, the FCA published a notice compelling the continued publication of the 1-month, 3-month and 6-month U.S. Dollar LIBOR settings for a limited period after June 30, 2023, using a “synthetic” methodology (the “synthetic USD LIBORS” and, together with the synthetic JPY and GBP LIBORs, the “synthetic LIBORs”).
In addition, financial regulatory agencies have either mandated or encouraged supervised institutions to cease entering into new contracts that use U.S. Dollar LIBOR as a reference rate after December 31, 2021, subject to certain limited exceptions.
Accordingly, parties who have entered into or may enter into transactions that use IBORS as benchmarks are exposed to the risk that the reforms and/or transition processes may:
i. result in the discontinuation of one or more IBORs (including any synthetic LIBORs);
ii. result in one or more IBORs performing differently than in the past (including as a consequence of transition to a “synthetic” methodology);
iii. require a need to determine or agree a successor or alternative reference rate (including as a consequence of the unavailability of U.S. Dollar LIBOR for new contracts entered into after December 31, 2021);
iv. require adjustments to the identified fallback alternative reference rate, which may include incorporation of a term structure methodology, the addition of a credit spread component, and any other applicable modifications;
v. require legacy financial products, trading agreement(s), contracts and confirmations to be updated;
vi. result in a mismatch between the rate referenced in one instrument such as a bond or loan and that referenced in another instrument such as a derivative, including where the derivative is intended to operate as a hedge;
vii. result in operational or technological difficulties, including in updating, amending and performing under agreements and in determining IBOR rates and alternative reference rates; and/or
viii. have other adverse effects or unforeseen consequences.
Even with spreads or other adjustments, alternative reference rates may be only an estimate or be an approximation of the relevant IBOR, may not be subject to continued verification against the relevant IBOR if it is suspended, discontinued or unavailable, may not achieve broad acceptance and/or be discontinued, and may not result in a rate that is the economic equivalent of the specific IBORs used in a transaction.
Any of the reforms and related transition actions, and/or any delay or uncertainty regarding them, or any failure of an alternative reference rate to be developed or gain market acceptance, could adversely affect IBOR-based obligations and investments and their economics, including the price, value or liquidity of IBOR-based obligations and investments, their usefulness for the intended purpose, the timing or amount of payments or deliveries and, if applicable, the likelihood that an investor will be able to exercise any option rights tied to IBOR levels.
Please note that, while the matters discussed in this Disclosure are focused on IBORS, they may be of equal relevance or applicability to reform efforts that may be undertaken in the future with respect to other interest rate benchmarks.
You should consult your own independent professional advisers and/or conduct your own independent investigation and analysis on the potential risks imposed by the reforms and the potential impact on your transactions.
Please note that this Disclosure must not be construed as legal, financial, tax, accounting or other advice. This Disclosure is not, and is not intended to be, a “research report”, “investment research” or “independent research” as may be defined in applicable laws and regulations worldwide.