Report: LIBOR Transition—Issues of Legal Uncertainty: 23 October 2020

In July 2017, the FCA announced that it would not guarantee the survival of LIBOR after the end of 2021.  After the announcement, industry groups established by the Bank of England, the Federal Reserve and the Swiss National Bank each identified a preferred Risk Free Reference rate for interest rates payable on transactions in their respective currencies.  The transition from LIBOR to other chosen risk-free rates has occupied the derivatives, securities and loan markets and early market engagement around the question of establishing term rates has proven particularly challenging.  Authorities around the world have grappled with possible methods by which they may help the market to transition away from LIBOR, especially in relation to those legacy contracts which may not contain a fallback clause or be easily amended.

This paper, although a departure from the Committee’s usual approach, is intended to survey the uncertainties in the context of LIBOR transition and the steps being taken by authorities around the world so as to draw attention to any residual issues.  It first comprises a brief overview of the Committee’s views as to the risks arising in respect of benchmark reform and, specifically, from the transition from LIBOR.  It also sets out an analysis of uncertainties arising from the U.K.’s impending withdrawal from the E.U. and the complexities it adds to the adoption of a successor rate.  Finally, the paper offers a survey of the specific ways in which it may be possible to mitigate the legal uncertainties in this context—including by legislative, regulatory or market action.  In examining each option, the FMLC has drawn out the strengths and weaknesses and attempted to present a thorough-going, impartial and publicly accessible account.

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