The IRS recently released Revenue Procedure 2020-44 (“Rev. Proc. 2020-44”) which provides helpful relief to taxpayers by providing that if a contract referencing an IBOR is modified to incorporate specific ISDA or AARC fallback language for the replacement of IBORs, such modification will not cause certain adverse tax consequences, such as exchange treatment under Section 1001 of the Tax Code, or the legging out or termination of integrated transactions under Treasury Regulation Sections 1.1275-6, 1.988-5(c) or 1.148-4(h).
On Monday, November 30, 2020, ICE Benchmark Administration (“IBA”), as administrator of LIBOR, announced that it will consult in early December 2020 on its plan to cease publication of the overnight and one-, three-, six- and 12-month U.S. Dollar LIBOR (“USD LIBOR”) settings immediately following the LIBOR publication on June 30, 2023. This announcement represents an effective extension of the end date for USD LIBOR, which previously was expected to cease following 2021.
On November 23, 2020, the Loan Market Association (the “LMA”) announced the publication of several new and revised documents, with the purpose of helping market participants incorporate appropriate transition mechanisms into their loan documentation.
Several remarks and releases by public officials and significant regulatory bodies in the first weeks of November garnered significant attention by financial institutions trying to discern next steps in the wind-down of USD LIBOR.
On November 18, 2020, the LIBOR administrator ICE Benchmark Administration (IBA) announced that they will consult on their intention to cease publication of GBP, EUR, CHF and JPY LIBOR settings across all tenors. Their announcement also indicated that IBA remain in talks with the FCA, other official sector bodies and panel banks regarding the future of USD LIBOR. On the same date, the FCA announced that they will publish consultations about their proposed amendments to the Benchmarks Regulation that, if passed, will give the FCA enhanced powers to direct methodology changes to critical benchmarks (more information on which can be found in our earlier blog post).
The exclusion of USD LIBOR from the IBA’s consultations may reflect the fact that the dollar market is further behind in its transition efforts, which may be due to the fact that SOFR is a new rate (unlike other replacement rates that have existed for decades). However, IBA have advised that further announcements are to be expected in respect of USD LIBOR, and that market participants should not expect USD LIBOR to continue to be published beyond December 31, 2020.
The FCA’s consultations, published on the assumption that the Financial Services Bill (in which their proposed amendments are included) is passed in its current form, cover:
- how the FCA would use the proposed new power to require continued publication of critical benchmarks on the basis of a changed methodology in certain circumstances; and
- the circumstances in which those powers would potentially become relevant.
Following these consultations, the FCA will set out their approach in Statements of Policy. In their announcement, the FCA advise that they envision using their proposed enhanced powers where:
- LIBOR currency-tenor settings are widely used in outstanding contracts and/or instruments that cannot practicably be transitioned away from the benchmark rate by actions or agreements by or between contract counterparties themselves (i.e. ‘tough legacy’ contracts); and
- using the powers would contribute to protecting consumers or preserving market integrity.
Following the publication of the IBA and FCA’s statements, ISDA published a statement clarifying that neither statement constitutes an Index Cessation Event under the IBOR Fallbacks Supplement or Protocol, and so will not trigger the fallbacks thereunder, nor have any effect on the calculation of the spread adjustment.
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
On November 6, 2020, Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”) (collectively, the “Agencies”) issued a joint “Statement on Reference Rates for Loans” (the “Joint Statement”).
On October 23, 2020, ISDA published its long-awaited IBOR Fallbacks Supplement to the 2006 ISDA Definitions (the Supplement) and Protocol. The publication is a result of years of consultations with regulators and market participants and seeks to provide a solution for the trillions of dollars of IBOR-referencing derivatives contracts. The Supplement and Protocol provide a standardised and efficient means of transitioning derivatives contracts currently referencing IBORs to risk-free rates. At present, uptake and market acceptance of these changes has been resounding, as over 700 parties have adhered to the Protocol less than four weeks after its launch.
On October 21, 2020, the UK Government introduced the Financial Services Bill (the Bill) to Parliament. The Bill is seen as a vital step towards ensuring the UK’s continued status as a global finance hub in the post-Brexit world, and it also introduces the UK Government’s legislative fix for LIBOR-referencing contracts that face insurmountable barriers in the transition from LIBOR (“tough legacy contracts”), as announced in June and discussed in our earlier update.
Following the DOJ’s favourable business review letter published on October 1, 2020 (as discussed in our earlier blog post), on October 9, 2020 ISDA released a statement from its Board of Directors in relation to the IBOR Fallbacks Supplement and Protocol. In it, they state that they have kept the Australian, Canadian, EU and other competition authorities fully informed of the issues covered in the DOJ’s letter, and that they do not anticipate any adverse action by these authorities in relation to the implementation of the new fallbacks.
As such, ISDA have announced that they will launch the IBOR Fallbacks Supplement and Protocol on October 23, 2020. The Supplement, and the amendments made by the Protocol, will then take effect from January 25, 2021. On this date, all new derivatives contracts incorporating the 2006 ISDA definitions and one of the covered IBORs will contain the new fallbacks, and legacy derivatives contracts will incorporate the new fallbacks if both counterparties adhere to the Protocol (or otherwise bilaterally agree the incorporation of the new fallbacks into their contracts).
Please contact any of the authors of this article or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.
On October 1, 2020, the U.S. Department of Justice’s (DOJ) Antitrust Division announced that it had completed its review of ISDA’s proposed amendments to its standard documentation to deal with IBOR discontinuation (by way of a Protocol and Supplement). The DOJ concluded that ISDA’s proposals do not harm competition, and so announced that they will not challenge them. A copy of the letter can be found here.