Aug 22, 2019
LIBOR's phasing out is slow but sure
On November 16, 2017, Chuhak & Tecson’s Banking Practice Group issued a client alert that proclaimed: “It is officially the beginning of the end of the London Interbank Offered Rate (LIBOR).” Its demise was brought on by a series of scandals involving allegations of manipulation. Now, here we are, in the third quarter of 2019, and it appears that despite that accurate proclamation, the market continues to be slow to adopt a replacement for LIBOR
Even though the Bank of England commenced publication of the Sterling Overnight Index Average (SONIA) and the New York Federal Reserve unveiled the Secured Overnight Financing Rate (SOFR), both rates merely continue to co-exist with LIBOR, rather than replace it. For example, the Alternative Reference Rate Committee (which is comprised of a group of 15 large banks) indicated that LIBOR still supported about $200 trillion in U.S. dollar derivatives and loans as of March, 2019.
In that context it is not surprising that in July 2019, John Williams, president of the Federal Reserve Bank of New York, said that financial firms need to stop dawdling and transition to a new reference interest-rate system to replace the LIBOR regime. To Williams and others in the industry, it is quite telling that contracts (e.g., loan documents) referencing U.S. dollar continue to include LIBOR without “robust fallback language.”
The advice in Chuhak & Tecson’s November 16, 2017, client alert remains valid-banks should address and thereby mitigate issues stemming from the termination of LIBOR by incorporating fallback language when and where appropriate. Recommended fallback language should specify what events will trigger the replacement of LIBOR and provide for an adjustment to the applicable spread to make the new rate more economically equivalent to LIBOR.
Contact a Chuhak & Tecson Banking attorney to determine the best approach to this transition of language.
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.
Client alert authored by: Andrew Luczak Glubisz, Principal