UK: What Now For LIBOR In Finance Documents?

Last Updated: 14 December 2017
Article by Catriona Lloyd, Catherine Astruc and Matthew Sapte

Andrew Bailey, chief executive of the FCA, announced on 27 July 2017 that the FCA would no longer use its influence or legal powers to persuade or compel LIBOR panel banks to continue making LIBOR submissions after 2021. This announcement has accelerated work already underway to find alternative benchmarks. It has also focused attention on how LIBOR-based finance documents should cater for the possible demise of LIBOR.

Why the need to transition away from LIBOR?

As Andrew Bailey acknowledged in his speech, significant improvements have been made to LIBOR since April 2013. However, the underlying market that LIBOR seeks to measure – the unsecured wholesale interbank lending market – has become significantly less active, leading to questions about the sustainability of the benchmark that seeks to measure it. Panel banks are, according to Mr Bailey, "feeling discomfort" about submitting submissions based on judgements "with so little actual borrowing activity against which to validate those judgements".

However, a planned and orderly transition away from LIBOR is key to avoid significant market disruption. As part of this orderly transition, the FCA announced on 24 November 2017 that it had secured the voluntary agreement of all 20 LIBOR panel banks to continue submitting contributions until the end of 2021. The FCA now expects focus to turn towards developing alternative rates and working towards a transition that can be executed smoothly.

As Andrew Bailey highlighted in his speech, the administrator of LIBOR, ICE Benchmark Administration, and the panel banks may continue to produce LIBOR after 2021 if they want to and are able to do so. The benchmark would, however, no longer be sustained by the FCA persuading or obliging panel banks to continue to make submissions. So its survival after 2021 is not guaranteed.

In addition to developing alternative benchmark rates, market participants will also need to consider existing or new LIBOR-based contracts that may continue beyond the end of 2021. These should have robust fall-back arrangements to allow for a smooth transition if LIBOR were to be discontinued.

Possible alternative benchmark rates

In the UK, the Bank of England's Working Group on Sterling Risk-Free Reference Rates has confirmed the Sterling Overnight Index Average (SONIA) as its preferred alternative benchmark to LIBOR for use in sterling derivatives and other relevant financial contracts.

On 29 November 2017, the Bank of England and the FCA announced that the Working Group would have a new mandate to drive forward a broad-based transition to SONIA over the next four years across sterling bond, loan and derivative markets. The aim is for SONIA to be established as the primary sterling interest rate benchmark by the end of 2021. A priority for the Working Group will be to make recommendations for the development of term SONIA reference rates. SONIA is an overnight rate and does not currently address the forward-looking terms and the credit risk element that LIBOR seeks to reflect.

In the US, the Alternative Reference Rates Committee has recommended the Secured Overnight Financing Rate, a broad measure of overnight Treasury financing transactions, as a robust alternative to US dollar LIBOR.

In the eurozone, a preferred risk-free overnight rate has not yet been identified. However, in September the Financial Services and Markets Authority, the European Securities and Markets Authority and the European Central Bank announced the launch of a new working group tasked with identifying and adopting a risk-free alternative overnight rate for euro-denominated finance transactions.

How does the Benchmarks Regulation (BMR) fit into this?

The BMR applies generally within EU member states from 1 January 2018, with limited provisions applying before this date.

The BMR will impose specific obligations on administrators of, and contributors to, benchmarks, as well as to users of benchmarks. Article 28(2) of the BMR requires a supervised entity that uses a benchmark (which includes LIBOR) to have robust written plans in place setting out what actions will be taken if a benchmark "materially changes or ceases to be provided". Supervised entities must reflect these plans in their contractual relationships with clients.

Supervised entities are, broadly, regulated firms, including credit institutions and investment firms.

The term "use of a benchmark" is defined under the BMR and includes:

  • issuing a financial instrument that references an index or a combination of indices;
  • determining the amount payable under a "financial instrument" or a "financial contract" (as defined in the BMR) by referencing an index or a combination of indices;
  • being a party to a financial contract that references an index or a combination of indices; and
  • providing a borrowing rate calculated as a spread or mark-up over an index or a combination of indices that is solely used as a reference in a financial contract.

So a supervised entity may be in scope if it issues a debt security or acts as a calculation agent on a transaction where interest on a financial instrument is calculated by reference to a benchmark. If so, it must ensure the relevant contracts documenting the financial instrument provide for "robust" fall-back plans. (Note that "financial contracts" broadly covers consumer credit and regulated mortgage contracts. So it would not include syndicated and other corporate lending facility agreements.)

Ensuring their compliance with the BMR is another good reason for market participants to think carefully about appropriate fall-back terms in their documents.

Current market changes to finance documents – debt capital markets transactions

Risk factors

For securities maturing after 2021 with floating rate interest rates, it may be appropriate to include a risk factor in offering circulars highlighting the upcoming transition away from LIBOR and other IBOR reference rates. Examples of risks that could be highlighted include:

  • any change to the relevant benchmark rate could affect the level of the published rate (including causing it to be lower); and
  • the application of the fall-back provisions could result in a fixed rate effectively being applied if the ultimate fall-back is by reference to the rate which last applied when the relevant IBOR reference rate was available. 

 Any such risk factors should be carefully drafted and tailored to the specific circumstances of the relevant financial instrument.

Amendment mechanics

Amending the terms of capital markets instruments can be difficult because the instruments are often held by a large number of underlying investors. We are seeing the use of the following terms to facilitate future necessary amendments on a discontinuation of a relevant interest rate benchmark:

  • In structured finance transactions, negative consent provisions are typically being extended to authorise the trustee to agree amendments relating to the discontinuation of a relevant IBOR reference rate, provided that certain conditions are satisfied. The relevant conditions may include:

    • the provision of certificates on behalf of the issuer confirming that the amendments relate to the reference rate's material disruption or discontinuation;
    • the alternative reference rate being officially recognised;
    • notice of the proposed amendments having been provided to all bondholders; and
    • a specific percentage of bondholders not having objected to the proposed amendments within a specified time period.
  • Where there is a controlling class of noteholders, the right to consent to amendments relating to the discontinuation or material disruption of IBOR reference rates may be reserved to that controlling class.
  • Changes to the calculation of interest rates are often reserved matters or "Basic Terms Modifications" requiring higher quorum and/or voting thresholds. Where this is the case, specific exemptions may be included for amendments relating to the introduction of (widely recognised) alternative reference rates in the event of the relevant IBOR reference rate being discontinued or materially disrupted.

Removal of discretion for the Trustee and/or Calculation Agents

Increasingly, trustees and agents are not wanting to exercise discretion to determine or calculate interest rates in the absence of a screen rate being available or an interest rate failing to be determined. They will be keen to ensure that clear fall-back provisions, which remove any discretion on the part of the trustee or the calculation agent, are included from the outset in the documentation.

Current market changes to finance documents – facility agreements

We are not currently seeing the widespread introduction of new terms into facility agreements to cater for the discontinuation of IBOR reference rates. LMA facility agreements have long contained fall-back interest rate benchmark mechanisms for use if a relevant published IBOR (the so-called "Screen Rate") is no longer available. Such provisions are, however, only ever temporary solutions to the unavailability of the Screen Rate. If an IBOR reference rate were to be discontinued, the LMA's agreements currently leave it to the parties to agree at the time whether to adopt a replacement rate. Since 2014, LMA facility agreements have included an optional clause allowing any such change to be made with the consent of the Majority Lenders and the borrower. Beyond this, there is arguably less need to "future proof" facility agreements at this stage because it is generally relatively easy for the parties to agree to amendments.

Current market changes to finance documents – derivative contracts

We are also not yet seeing significant bespoke amendments to ISDA-based derivative contracts. ISDA has established working groups focusing on:

  • developing fall-back rates or mechanisms to use if LIBOR and other IBORs are permanently discontinued;
  • amending the ISDA 2006 Definitions to incorporate those fall-back rates or mechanisms; and
  • developing plans to enable the amended definitions to apply to legacy transactions, most likely through the use of a protocol mechanism.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Duane Morris LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Duane Morris LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions