On 29 May 2020, the Bank of England updated its web page concerning the transition to sterling risk-free rates from LIBOR by adding a paper from the Working Group on Sterling Risk-Free Reference Rates (RFRWG) on the identification of tough legacy issues.
Tough legacy contracts are considered to be those that do not have robust fallbacks and prove unable to be amended ahead of LIBOR discontinuation.
To the extent that action can feasibly be taken, and accepting the challenges and dependencies required in delivering it, the paper proposes that the UK Government considers legislation to address tough legacy exposures in contracts governed by English law that reference at least sterling LIBOR, and ideally other LIBOR currencies, that are still in operation when LIBOR is expected to cease on or after the end of 2021.
However, while the paper has a preference for a legislative solution of some kind, it recognises that there is no guarantee that such a solution will materialise, that it will materialise across all relevant legal jurisdictions, or that it would be available for all products and circumstances (and COVID-19 may well introduce further constraints on this).
Consequently, the paper recommends that:
- other solutions to the tough legacy problem should be pursued in parallel. For example, the RFRWG has considered the scenario of LIBOR being stabilised via a so called ‘synthetic methodology’ for a wind down period following panel bank departure (which is expected to happen at some point after the end of 2021) especially if those departures put LIBOR at risk of being unrepresentative under the EU Benchmark Regulation. The paper notes that this scenario would require either an administrator willing to modify the methodology for LIBOR and/or potentially official sector intervention to modify it; and it would be important that the rate could be used in existing contracts without those contracts needing to be changed; and
- in any event, the paper calls on market participants to focus primarily on active transition. Proactive transition of contracts away from reliance on LIBOR ensures that parties to the transaction have control over the timing and substance of the transition. This is the only way for parties to have certainty over their contracts.