With the deadline for banks to stop using LIBOR as an interest rate benchmark just over two weeks away, new measures taken by the Financial Conduct Authority (FCA) mean a possible wave of litigation will likely be avoided for now. But international law firm RPC warns that banks need to use this time to properly transition away from the outgoing benchmark interest rate.
The FCA recently announced it would relax the January 1, 2022 deadline for financial services to stop using LIBOR as a reference rate in contracts, which many feared would lead to disruption and a wave of litigation. It has sparked a glut of work for contract review vendors and alternative legal service providers such as UnitedLex, Integreon, Epiq, Factor and Axiom, which have been engaged in the mass repapering exercise.
With the FCA recently confirming that an unexpectedly wide range of legacy contracts would be permitted to use ‘synthetic’ LIBOR rates through 2022, it is likely this litigation will be postponed.
If there had been no agreement to publish a synthetic LIBOR or the scope of contracts permitted to use it had been narrower, banks would have to spend the last weeks of December trying to renegotiate all contracts with LIBOR written into them under ever-increasing pressure.
Dan Hemming, a partner in RPC’s banking disputes team, said: “The hard stop to LIBOR in the FCA’s original timetable of December 31 threatened to make the last month of the year extremely tense and chaotic for financial institutions and their customers. It looks like the FCA has been pragmatic and blinked.
“Without the wide use of synthetic sterling LIBORs being permitted for 2022 we could have well seen a surge in litigation in the new year, particularly in connection with bonds where the transition away from LIBOR has presented the greatest practical difficulties.
“This softening of the FCA deadline will be welcomed by many. However, the FCA has made clear that those with legacy LIBOR contracts must use this time to properly transition away from LIBOR.”