Checklist for completing the transition away from LIBOR

Firms have taken huge strides away from using LIBOR as a benchmark – but, as Sarah Boyce reports, it’s not over yet

The Financial Conduct Authority has provided a helpful summary of the status of LIBOR fixings with effect from 31 December 2021.

The LIBOR settings that have ended are:

• All euro and Swiss franc LIBOR settings;
• The overnight/spot next, one-week, two-month and 12-month sterling and Japanese yen LIBOR settings; and
• The one-week and two-month US dollar LIBOR settings.

The one, three- and six-month sterling and Japanese yen LIBOR settings are deemed Article 23A benchmarks, meaning they are now permanently unrepresentative of the underlying market they seek to measure.

These six LIBOR settings are now calculated in a way that is generally referred to as ‘synthetic’ LIBOR. However, synthetic yen LIBOR will cease at the end of 2022 and availability of synthetic sterling LIBOR is not guaranteed beyond the end of 2022.

The remaining five US dollar LIBOR settings will continue to be calculated using panel bank submissions until mid-2023 but, broadly speaking, no new transactions are permitted to reference LIBOR in any currency.

A 2022 checklist for corporates

LIBOR transition is not complete for most corporates. The tasks outstanding can be broadly split into ‘active transition’ and ‘unintended consequences’.

LIBOR benchmarks will continue to be phased out through 2022/23, so corporates need to move away from any references to LIBOR.

They need to be alive to risks if different instruments fall back to different reference rates or adopt differing market conventions.

Some issues for corporates to check include:

1. External loans – do they transition to an appropriate alternate reference rate on the next rollover date?
2. GBP bonds – is it possible to achieve consent solicitation to transition away from LIBOR?
3. Derivative contracts – where the ISDA fallbacks have been adopted, does this have any unintended economic or accounting consequences if any underlying exposure falls back to an alternate reference rate?
4. USD-denominated contracts (under US law) – will generally fall back to SOFR (under various legislative packages), but there may be unintended consequences, so review the specific instance that applies in each case.
5. Statutory replacement rates for EUR (EONIA) and CHF LIBOR – review those benchmarks to ensure consistency across the entire financial contracts portfolio.
6. Intercompany loans – has an alternative solution been identified (and, if necessary, agreed with the tax team)?
7. Commercial contracts and in-house systems – where LIBOR is referenced, what approach has been decided upon?

Progress with regards to transition away from LIBOR as a reference rate could be broadly summarised as either the end of the beginning (USD) through to the beginning of the end (GBP, JPY and CHF).

In any event, transition is largely incomplete and will likely remain on the treasurer’s agenda throughout 2022.

About the author

Sarah Boyce is associate director of policy and technical at the Association of Corporate Treasurers

This article was taken from the Issue 1, 2022 edition of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership