LIBOR Reform

McGuireWoods' Response to the Publication of the Wheatley Review

September 28, 2012

The much-anticipated Wheatley Review on reforming the London interbank offered rate (LIBOR) was published this morning, 28 September 2012 .

The three key conclusions and recommendations are:

  1. There is a clear case in favour of comprehensively reforming LIBOR, rather than replacing it. The Wheatley Review concludes that a transition to a new benchmark would pose an unacceptably high risk of significant financial instability and risk large-scale litigation between parties holding contracts that reference LIBOR.
  2. Transaction data should be explicitly used to support LIBOR submissions.
  3. Market participants should continue to play a significant role in the production and oversight of LIBOR.

As anticipated, as part of the reform of LIBOR it has been recommended that responsibility for LIBOR be transferred from the British Bankers’ Association (BBA) to a new administrator. It therefore seems LIBOR will continue to exist, although it will be administered by a new body.

The other point to note is that it has been recommended that the number of currencies and tenors for which LIBOR is published be reduced. Specifically, it is recommended that publication of all LIBOR rates for Australian dollars, Canadian dollars, Danish kroner, New Zealand dollars and Swedish kronor be discontinued. The Wheatley Review suggests a six- to 12-month transition period for the removal of these currencies. Facilities involving those currencies will need to be carefully reviewed.

With regard to the impact on loan documentation, the issue arises where express reference is made to the British Bankers’ Association LIBOR rate. This is the terminology used for example in the London-based Loan Market Association’s recommended form of syndicated facility agreement. Although the document provides for an alternative method for determining the interest rate, we would expect that in the longer term, documentation changes will need to be made in order to make proper reference to the new LIBOR administrating authority.

The U.K. government has already indicated that the Wheatley recommendations will be enacted through new parliamentary legislation. It will be interesting to see if that legislation includes a provision whereby all references to BBA LIBOR in English law governed contracts will be treated as being a reference to the new LIBOR. That would be an efficient solution for English law governed contracts although it is not mentioned in the Wheatley Review.

Concern also arises in relation to ISDA documentation. However, comfort can be taken from the fact that while the Wheatley Review recommends reform of LIBOR, it is also mindful of the need to avoid causing financial instability or risking large-scale litigation between parties holding contracts that reference LIBOR. It is in the interests of all parties to arrive at a sensible solution that causes as little upheaval to existing contracts as possible.