LIBOR, the world’s most-used interest rate benchmark, is set to be phased out by the end of 2021. As the impacts of COVID-19 continue to evolve, there is speculation as to whether the pandemic will delay the projected LIBOR cessation timeline. The Financial Conduct Authority (FCA) is the conduct regulator for 59,000 financial services firms and financial markets in the UK and the prudential regulator for over 18,000 of those firms. On March 25, 2020, the FCA provided guidance as to its thoughts regarding the impact of the COVID-19 pandemic on the projected LIBOR cessation schedule. The FCA said, “The central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed and should remain the target date for all firms to meet.” The FCA did acknowledge that the impact of COVID-19 has resulted in stress to the banking sector, which would most likely result in interim transition milestones not being met.
As of March 25, 2020, U.S. bodies, such as the Federal Reserve and the Alternative Reference Rates Committee (ARRC), have not publicly commented on COVID-19 as it relates to the projected LIBOR cessation timeline. We did note that a member of the ARRC and co-chair of the ARRC’s Business Loans Working Group, the Loan Syndications & Trading Association, in response to member inquiries, said that as of now it must be assumed that the LIBOR cessation will occur as scheduled at the end of 2021.
In addition to developments regarding the LIBOR cessation timeline, the financial markets will be monitoring the behavior of the Secured Overnight Financing Rate (SOFR), the ARRC’s recommended replacement rate for LIBOR, during the period of economic distress caused by the COVID-19 pandemic. Prior to the pandemic, certain institutions expressed concern to their regulators that SOFR may not be an adequate benchmark for lending products during times of economic instability. Their contention was that during recessionary periods SOFR will likely decrease disproportionately relative to other market rates as investors flock to U.S. Treasury securities. Regulators, including the Fed, took the issue under advisement and stated that they would facilitate additional discussions on the topic. Early indications are that the concerns that SOFR would not behave similarly to LIBOR, and be more volatile, in periods of economic stress have not been allayed.
As institutions navigate managing the economic impact of COVID-19, they are likely to deprioritize LIBOR transition efforts in the short term. The FCA has said that it has held talks with the Bank of England and industry working groups as to the COVID-19 impact on the LIBOR cessation timeline and it will continue to assess going forward. As of now, however, the governing bodies have reinforced the expectation that LIBOR cessation is projected to occur as scheduled in late 2021. Given that, it is imperative that companies continue to remain vigilant in their LIBOR transition efforts.
Special thanks to contributors: Travis Duggan, Yomaira Escalante, Mike Lowen Sr. and Scott McKnight.