The USD LIBOR panel ceases later this month, on 30 June 2023, marking a major milestone in the transition away from LIBOR to robust Risk-Free Reference Rates.
However, this is not quite the end of the road for USD LIBOR. Publication of the 1-, 3- and 6-month USD LIBOR settings will continue under an unrepresentative "synthetic" methodology until end-September 2024 published by LIBOR's administrator, ICE Benchmark Administration Limited, following an announcement earlier this year by the FCA.
The FCA's decision offers a bridging solution for users of USD LIBOR, both within and outside the UK. It is intended to deal with the significant pool of outstanding legacy USD LIBOR contracts governed by UK or other non-US law, which have no realistic prospect of being amended to transition away from USD LIBOR by end-June 2023. Publication of synthetic USD LIBOR by ICE is intended to "flow through" to global users of existing LIBOR contracts continuing to reference the rate (subject to other jurisdictions’ legislative frameworks). The extra time provided by synthetic USD LIBOR should allow parties to continue to transition away from the benchmark until end-September 2024.
For USD LIBOR contracts governed by US law, US federal legislation will move contracts that contain no, or unworkable, fallbacks, to alternative rates when the USD LIBOR panel ends (under the Adjustable Interest Rate (LIBOR) Act). For these contracts, references to USD LIBOR will be replaced, by operation of law, with a SOFR-based benchmark replacement. The FCA has confirmed that synthetic USD LIBOR, published by ICE in the UK, will be calculated on the same basis as the replacement rate under the US LIBOR Act, to avoid bifurcation between legacy USD LIBOR contracts governed under non-US law and US law.
From a distance, this appears to offer a complete global solution for the end of USD LIBOR, with the jurisdictional jigsaw pieces of the UK and US regimes fitting neatly together. However, the extraterritorial effect of synthetic USD LIBOR gives rise to a potential risk of conflicts of laws. For a detailed analysis of how these risks might arise for US law and non-US law contracts respectively, see our blog post: Will publication of synthetic USD LIBOR impact the litigation risks of transition?
You can find all of our previous blog posts commenting on the evolving risks of LIBOR transition here.
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