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Life after LIBOR: the Critical Benchmarks Bill

The majority of LIBOR settings are due to come to an end on 31 December 2021. Draft legislation has now been introduced to deal with the transition of certain contracts (referred to as “tough legacy” contracts) which will not have been able to switch away from LIBOR before the end of the year.

The Critical Benchmarks (References and Administrators’ Liability) Bill

Under the Critical Benchmarks (References and Administrators’ Liability) Bill (“Benchmarks Bill”), parties to these tough legacy contracts will be deemed always to have agreed that the contracts should reference ‘synthetic LIBOR’, thereby ensuring minimal disruption in the market.

‘Synthetic LIBOR’ will be calculated and published by the FCA. It is a non-representative and synthetic calculation of sterling, yen and US LIBOR settings as a benchmark for use in certain permitted tough legacy contracts.

The Benchmarks Bill, when enacted, will mean that, after 31 December 2021, references to LIBOR in tough legacy contracts will be interpreted as a reference to synthetic LIBOR, inclusive of any changes made by the FCA. This aims to give certainty to parties to these contracts so that the use of synthetic LIBOR cannot be used to challenge the enforceability of a contract.

The FCA is yet to confirm which contracts will be permitted to use synthetic LIBOR. The HM Treasury Policy paper published in October 2020 states that use will only be permitted in “contracts that genuinely have no realistic ability to be renegotiated or amended to transition to an alternative benchmark” before the end of the year.

Although the Benchmarks Bill will bring a degree of certainty to the market, it is important to remember that synthetic LIBOR will only be published for a limited period. Those tough legacy contracts permitted to use it will still be required to transition to an alternative bench reference rate in the future.

Further information

For more information on the Benchmarks Bill and synthetic LIBOR, please speak to Druces’ Head of Banking & Financial Services: