Global and US financial services regulators are increasing their warnings on the impending end to the use of the London Interbank Offering Rate (LIBOR) as a reference rate in financial contracts and the risk to the global financial system if there is inadequate preparation by financial institutions. Most LIBOR settings are ending this year, with a few USD LIBOR settings continuing into 2023.

On June 2, 2021, the Financial Stability Board (FSB), a group of international financial regulatory authorities that monitors and makes recommendations about the global financial system, issued an updated “Global Transition Roadmap” setting out key actions and deadlines by which financial institutions should be completing their documents review for LIBOR and transitioning to other rates. By now, firms should have reviewed all existing LIBOR exposures, assessing whether the contracts provide for fallback rates, determining what changes need to be made and deciding on the process by which to amend them (such as assessing whether counterparties need to approve an amendment).

The impending termination of LIBOR also was a topic for discussion at the June 11, 2021, meeting of the US Financial Stability Oversight Council (FSOC), which consists of US financial regulators and monitors the financial system to discern and respond to risks to US financial stability. Among the issues raised in the discussion:

  • The need for financial firms to be showing significant process by now on their LIBOR transition projects
  • The desire by some market participants for a forward-looking reference rate as a substitute for LIBOR
  • The necessity for financial firms to make decisions on the use of alternative reference rates tailored to the particular transaction

Some of the FSOC members, including the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and FSOC Chair and Treasury Secretary Janet Yellen, publicly issued their remarks to be made at the meeting.

Prior to the FSOC meeting, on June 8, 2021, the Commodity Futures Trading Commission issued a statement that its Market Risk Advisory Committee’s Interest Rate Benchmark Reform subcommittee, had endorsed a transition from LIBOR to the Secured Overnight Financing Rate (SOFR) endorsed by the Alternative Reference Rates Committee (ARRC) on US dollar linear interest rate swaps as a best practice. More specifically, it recommended that starting July 26, 2021, interdealer brokers replace trading of LIBOR linear swaps with trading of SOFR linear swaps.

The ARRC, which has been the subject of several of our LIBOR blog posts, issued a press release endorsing the CFTC’s recommendations and again recommending SOFR as the reference rate of choice. It also issued a press release after the FSOC meeting, stating that the ARRC welcomed the FSOC members’ comments on utilizing SOFR as a “robust” alternative reference rate.

Norton Rose Fulbright has assembled a group of its attorneys from around the globe to stay on top of these issues and assist clients in the transition to new reference rates. More information can be found here.