The Federal Reserve’s governing body is calling on banks to cease entering new contracts that use the US dollar LIBOR as their reference rate.
Board of governors of the Federal Reserve System are urging banks to cease using LIBOR “as soon as practicable” and in any event by 31 December, 2021, when the rate is set to be discontinued.
New contracts entered into before 31 December should either utilise a reference rate other than LIBOR or have “robust fallback language” that includes a clearly defined alternative reference rate after LIBOR’s discontinuation, the Federal Reserve states.
The administrator of LIBOR has announced it will consult on its intention to cease the publication of the one week and two month US dollar LIBOR settings immediately following the LIBOR publication on 31 December, 2021, and the remaining US dollar LIBOR settings immediately following the LIBOR publication on 30 June, 2023.
The Federal Reserve warns that failure to prepare for disruptions to US dollar LIBOR, including operating with insufficiently robust fall back language, could “undermine financial stability and banks’ safety and soundness”.
Entering into new contracts that use the rate after 31 December, 2021, would create what it calls safety and soundness risks which would be examined accordingly.
If the administrator of LIBOR extends the publication of the rate beyond 31 December, 2021, the agencies recognise that there may be limited circumstances when it would be appropriate for a bank to enter into new US dollar LIBOR contracts after that period.
Richard Sharman, partner at Bird & Bird tells Airfinance Journal, that the announcement echoes similar statements by the UK regulators that banks really must stop using LIBOR in new deals.
"This goes further to say if LIBOR is used then you need to specify the alternative rate and not leave it to be agreed or specified later," he says. When the aviation senior debt market fell away due to the pandemic deals were being done based on US dollar LIBOR with the basic LMA 'agreement to agree an alternative rate' language – and whilst currently there is a reduced volume the aviation lending deals we are advising on haven’t yet changed the approach.
"But the US regulators are now saying this isn’t ok and if you use LIBOR the alternative rate actually has to be specified".
"When the aviation lending market comes back again it will need to take a step forwards on alternative rates. In other more active sectors we're seeing "rate switch" clauses being used widely – as yet there isn’t a clear market position on clause wording as some banks follow LMA and others have in-house wording that is quite different.
"Ultimately the work in other sectors will end up with a market position and the aviation lending sector can benefit from that. I would expect during 2021 if the aviation senior debt market comes back then there will be a step-change in approach and banks will focus more on pricing deals based on the alternative rate (SOFR plus a spread) at the outset.
"By then time on LIBOR will be running out and there will be pricing uncertainty if you only focus on LIBOR and not the alternative rate that will replace it," says Sharman.
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Phasellus ultrices urna eu consequat pulvinar. Suspendisse malesuada scelerisque iaculis. Cras ut facilisis arcu, posuere efficitur nisi. Fusce dictum tortor ac nibh rhoncus auctor. Praesent nunc felis, elementum vel orci quis, sodales tincidunt nisi. Vestibulum vestibulum vel erat quis feugiat. Nam nec pulvinar velit. Nunc feugiat felis lacus, non condimentum urna interdum vitae. In laoreet hendrerit commodo. Sed diam arcu, tincidunt quis augue ac, venenatis consequat dui. Quisque maximus venenatis erat, sed malesuada quam malesuada at. Aenean non quam a ex vulputate laoreet. Praesent eget neque convallis, rhoncus lorem a, venenatis metus. Maecenas sed malesuada purus.
Integer vel neque vel odio tempor laoreet. Praesent vel malesuada dolor, sit amet aliquam augue. Cras magna tortor, ullamcorper nec tristique ac, accumsan quis metus. Integer in magna sit amet leo vulputate vulputate. In pretium quam libero. Cras a pulvinar arcu, et rutrum orci. Proin euismod, justo quis scelerisque porttitor, purus odio dignissim ex, eu rhoncus lorem dolor sit amet mi. Pellentesque in massa vel mauris tempus euismod. Aenean efficitur vestibulum arcu ut elementum. Nam rhoncus ligula vel enim iaculis, quis luctus dui interdum. Nulla erat mi, lacinia eu orci ut, hendrerit fermentum lorem. Sed non gravida quam. Pellentesque habitant morbi tristique senectus et netus et malesuada fames ac turpis egestas. Nulla bibendum erat odio, pharetra lobortis eros blandit a.
In et ultrices ante. Vestibulum consequat libero quis quam tempor, efficitur accumsan lacus sollicitudin. Class aptent taciti sociosqu ad litora torquent per conubia nostra, per inceptos himenaeos. Phasellus ac est lacus. Quisque in interdum urna, non pulvinar sem. Duis tristique tortor vel urna commodo tincidunt sit amet ut sem. In sapien turpis, porta vitae neque in, varius egestas erat.
Interdum et malesuada fames ac ante ipsum primis in faucibus. Donec quis est vel ante facilisis efficitur. Pellentesque tincidunt odio eget lacinia vestibulum. Aliquam erat volutpat. Ut ac ipsum non nisi convallis eleifend et ornare lectus. Pellentesque diam nulla, dapibus quis convallis sed, posuere at urna. Proin tincidunt tincidunt nibh, id molestie est. Integer iaculis, leo sit amet pulvinar pellentesque, tellus elit vehicula ipsum, eget vulputate dui tortor vitae sem. Proin rhoncus venenatis tellus, vitae blandit ipsum malesuada sed. Morbi gravida magna hendrerit faucibus imperdiet. Ut bibendum a massa at efficitur. Donec egestas urna urna, sit amet mattis erat fringilla sit amet. Integer scelerisque enim sed odio semper molestie. Sed tincidunt malesuada nulla a fringilla. Nullam suscipit, justo nec facilisis efficitur, arcu mauris finibus lorem, ut egestas mi purus nec neque. Nunc nec euismod est, ac egestas neque.
Vivamus sit amet pretium quam, vitae fringilla dolor. In nec ligula arcu. Fusce a tortor leo. Sed blandit leo quis turpis sodales, eget tincidunt tortor ultrices. Fusce scelerisque eros quis quam vestibulum tempus. Praesent sodales aliquam nibh vel fermentum. Quisque vel diam sit amet sem convallis interdum. Proin ac velit molestie, malesuada tellus vitae, tempus est. Sed facilisis ut enim ac pretium. Mauris scelerisque fermentum risus, nec ultricies enim finibus vel. Aenean sem enim, dictum mollis aliquet nec, consequat nec nisl. Duis aliquam a lectus vitae ornare.