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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:

  • immediately after December 31, 2021, publication of all seven euro LIBOR settings, all seven Swiss Franc LIBOR settings, the spot next, 1-week, 2-month and 12-month Japanese Yen LIBOR settings, the overnight, 1-week, 2-month and 12-month British Pound Sterling LIBOR settings, and the 1-week and 2-month U.S. Dollar LIBOR settings will permanently cease;
  • immediately after June 30, 2023, publication of the overnight and 12-month U.S. Dollar LIBOR settings will permanently cease;
  • immediately after December 31, 2021, the 1-month, 3-month and 6-month Japanese Yen LIBOR settings and the 1-month, 3-month and 6-month British Pound Sterling LIBOR settings will cease to be provided or, subject to consultation by the FCA, be provided on a changed methodology (or “synthetic”) basis and no longer be representative of the underlying market and economic reality they are intended to measure and that representativeness will not be restored; and
  • immediately after June 30, 2023, the 1-month, 3-month and 6-month U.S. Dollar LIBOR settings will cease to be provided or, subject to the FCA’s consideration of the case, be provided on a synthetic basis and no longer be representative of the underlying market and economic reality they are intended to measure and that representativeness will not be restored.

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;

ii. result in one or more IBORs performing differently than in the past;

iii. require a need to determine or agree a successor or alternative reference rate;

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.