April 3, 2023
On April 3, 2023, the Financial Conduct Authority (“FCA”) announced that it will require LIBOR’s administrator, ICE Benchmark Administration Limited, to continue to publish 1-, 3- and 6-month USD LIBOR settings using an “unrepresentative synthetic methodology” (“Synthetic USD LIBOR”) until September 30, 2024.
Synthetic USD LIBOR will be calculated using 1-, 3- and 6-month CME Term SOFR, published by CME Group Benchmark Administration, plus the applicable ISDA fixed spread adjustment (0.11448%, 0.26161% and 0.42826% for 1-, 3- and 6-month tenors, respectively).
The US financial regulators’ prohibition of new LIBOR contracts undoubtedly will extend to Synthetic USD LIBOR. Legacy LIBOR contracts covered by the Adjustable Interest Rate (LIBOR) Act (“LIBOR Act”) generally should not be affected by Synthetic USD LIBOR, although we acknowledge there are some who suggest it may delay the switch to SOFR for certain contracts covered by the Act. This is a controversial view, but given that the Board-selected benchmark replacement under the LIBOR Act and the methodology for Synthetic USD LIBOR result in the same rate, it seems like six of one, half a dozen of the other (except for consumers, who get the benefit of a 1-year transition of a portion of the spread adjustment under the LIBOR Act, but not with Synthetic USD LIBOR). Some legacy contracts not covered by the LIBOR Act—typically, contracts with express fallback provisions—may continue on Synthetic LIBOR if contractual language, including the definition of “LIBOR,” does not preclude use of Synthetic USD LIBOR. Contracts that fallback to a replacement rate upon LIBOR becoming “non-representative” will be unable to use Synthetic USD LIBOR. Any use of Synthetic USD LIBOR will require careful consideration and contractual analysis.
Hunton Andrews Kurth LLP’s multi-disciplinary LIBOR transition client service team is available to assist clients navigating LIBOR transition, including analysis of the LIBOR Act and use of Synthetic USD LIBOR. For further information, contact any of the related people.