Impact of LIBOR transition on end users

An update on recent changes

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LIBOR has historically been published in a number of tenors. The least used sterling LIBOR tenors (overnight, one week, two month and 12 month) were published for the last time on 31 December 2021 and have now completely ceased to be available.

The remaining most-used sterling LIBOR tenors (one month, three month and six month), for now, continue to be published. However, the panel of banks which previously contributed submissions to create the LIBOR rates has now ended. Going forward, these continuing LIBOR tenors will be calculated using a different methodology established by the FCA and will no longer be representative of the underlying market LIBOR has historically sought to measure. This is commonly referred to as ‘synthetic LIBOR’.

The FCA has set out clear rules for the use of synthetic LIBOR rates. The rates will only be available for use in existing contracts already linked to LIBOR and will not be able to be used in any new contracts. The regulator has made clear synthetic LIBOR remains a short-term solution, with its continued publication to be reviewed every year.

What does this mean for businesses?

Most businesses with existing sterling LIBOR linked facilities should have now been contacted by their lender and had their existing contract moved onto a safer alternative rate, such as SONIA or Bank of England base rate.

Where this has not yet been possible, synthetic LIBOR ensures that contracts can continue to operate now that panel bank sterling LIBOR has discontinued. However, given it is only a short-term solution, where contracts remain on synthetic LIBOR, businesses should prepare to engage with their lender on how their contract can move to an alternative rate.

Businesses with multi-currency facilities may also be impacted by the transition away from other currency LIBOR settings. Less commonly used LIBOR currencies, in euro, Swiss franc and the least used yen tenors have also ceased to be published at the end of 2021. It is only the one-, three- and six-month yen tenors that will continue in the form of synthetic LIBOR until the end of 2022.

For USD LIBOR, the most used settings will continue to be calculated using panel bank submissions until June 2023. However, new use of USD LIBOR is now prohibited by the UK regulators, with limited exceptions. Lenders will now be working to engage customers in order to transition existing USD LIBOR contracts by June 2023.

For more information on LIBOR transition and the changes that took place at the end of 2021, the FCA and Working Group on Sterling Risk-Free Reference Rates have a number of useful publications.

ACCA’s Technical Factsheet on FAQs to the LIBOR transition will be withdrawn later this year.