On February 15, 2021, the UK Treasury published a consultation paper on potential legal ‘safe harbor’ rules for legacy LIBOR-referencing contracts which have been amended by the Financial Conduct Authority (the FCA) under the Financial Services Bill.
Under the Financial Services Bill, as discussed in more detail in our earlier blog post, the FCA will be empowered to designate a benchmark that is unrepresentative (or at risk of becoming so) as an Article 23A benchmark. Following such designation, the use of that benchmark will be prohibited unless that benchmark falls under the exception found at Article 23C. Pursuant to Article 23C, the FCA can issue a notice permitting “some or all legacy use of a benchmark by supervised entities”. Furthermore, under Article 23D, the Article 23A benchmark may be published under a different methodology (this is often termed ‘synthetic LIBOR’). These powers will enable the FCA to oversee the orderly wind-down of LIBOR (and other critical benchmarks).
Since the introduction of the Financial Services Bill to Parliament on October 21, 2020, HM Treasury have been approached with suggestions for a legal ‘safe harbor’ for those legacy contracts that reference a benchmark that has been designated as an Article 23A benchmark. This would provide parties to those relevant legacy contracts with protection from certain legal claims. In particular, stakeholders have suggested that neither the designation of an Article 23A benchmark nor the methodology change under Article 23D should have the effect of:
- discharging or excusing performance under any contract (including, but not limited to force majeure);
- giving any party the right to unilaterally terminate or suspend performance ;
- giving rise to liability for a facility agent/calculation agent (or any person in a similar role or role ancillary to the main contract) where they use the rate after designation under Article 23A in performance of their obligations under the contract;
- constituting a breach of contract or voiding any contract; or
- amending, modifying or novating a contract.
In view of these suggestions, HM Treasury are seeking views on whether a legal safe harbor will be a useful supplement to the Financial Services Bill and, if so, the design and scope of any such legislation. This consultation will close on March 15, 2021. Market participants are encouraged to respond to the consultation to ensure the views of a wide range of sectors and firms who hold contracts referencing LIBOR are obtained.
Please contact any of the authors of this briefing or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.