ISDA has welcomed the FCA’s 20 January letter, now on the ISDA website, which states that that market participants should not assume that any period of non-representativeness of LIBOR if and when contributors case to contribute to it would last for “more than a short period”, meaning “months, not years”. This makes it possible for ISDA to re-run its 2019 consultation on this topic (readers will remember that the results of its May 2019 consultation on this were inconclusive, with swap market respondents evenly split) and, if the outcome is more clear-cut, to comply with the wishes of the regulators (such as the FCA and the FSB) over the last few months to include a pre-cessation trigger based on LIBOR being declared to be non-representative.
The FCA was unequivocal – not for the first time – that it has no plans to use its BMR powers to sustain panel bank LIBOR beyond end-2021, even for the benefit of the so-called “tough legacy” of LIBOR-referencing contracts that cannot be amended to adopt a post-LIBOR alternative. It has a working group on the topic of the “tough legacy” and solutions are not obvious; the ARRC is considering amending New York law to address the issue, and the FCA has not ruled out a legislative approach, if it is feasible.
Meanwhile LCH (which operates SwapClear, the swaps clearing house which claims to cover 95% of the plan vanilla IRS market) stated just before Christmas that it “would find it challenging, from a risk management and regulatory perspective, to continue to clear swaps linked to such a benchmark”, and for that reason is consulting its members on a proposed rulebook change to provide for an automatic trigger at the time when the FCA determines that an IBOR has become non-representative, at which point the LIBOR reference would switch over to the adjusted RFR as formulated in the relevant ISDA supplemented IBOR definition plus a credit spread adjustment. And on Friday 24 January, IBA Benchmark Administration Limited wrote to ISDA and, whilst it was short on detail, mainly referring to article 11(4) of the BMR, IBA did confirm that “IBA would not be comfortable with publishing an unrepresentative benchmark”, rightly pointing out that “the indefinite or continuing publication of an unrepresentative LIBOR is not contemplated by the BMR”.
ISDA plans to publish amendments to its 2006 derivatives definitions on permanent cessation fallbacks by the end of March, with a protocol to amend existing contracts in Q2 of 2020.