LIBOR (London Interbank Offered Rate) and other interbank offered rates (IBORs) are interest rate benchmarks that are widely used for many financial instruments, including swap agreements, securitizations and lending contracts. However, regulators globally have determined that existing interest rate benchmarks must be reformed.1 The European Union has adopted rules that regulate benchmark interest rates, and in July 2017, the UK Financial Conduct Authority (FCA) announced that, at the end of 2021, “it would no longer be necessary for the FCA to persuade, or compel, banks to submit to LIBOR.”2 Since that announcement, regulatory agencies, trade groups and financial market participants have begun preparing to transition to alternative risk-free rates (RFRs). On June 12, 2018, International Swaps and Derivatives Association, Inc. (ISDA) published a consultation (the ISDA Consultation) seeking market input regarding how ISDA’s standard documentation should be amended to implement fallbacks for certain key IBORs.3 On the same day, the Chairman of the U.S. Commodity Futures Trading Commission called the discontinuation of LIBOR a “certainty.”4
At this time, the details of successor rates to LIBOR and other IBORs are still being determined. Not coincidentally, a recent survey of key market participants reveals that most have not developed robust transition plans to address the phase out of LIBOR.5 This Sidley Update offers an overview of key challenges related to the LIBOR transition and the impact that it may have on buy side participants in the derivatives markets (Buy Side Participants), and it highlights some of the issues and actions that Buy Side Participants should consider in preparation for LIBOR’s phase out.
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