Could changes in LIBOR-setting lead to frustration in current contracts?

Could changes in LIBOR-setting lead to frustration in current contracts?

There is a move to transaction-based benchmarks for calculating LIBOR rates. Saaman Pourghadiri, barrister at Outer Temple Chambers, questions whether this change in methodology is likely to lead to frustration in current contracts.

What are the current plans to overhaul LIBOR or create alternative reference rates?

Following the regulatory findings made in relation to the manipulation of LIBOR in June 2012 and thereafter, a series of reviews into benchmarks were instigated by global bodies such as the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB). In July 2014 the FSB published recommendations for the reform of interbank unsecured lending markets (IBORs), including LIBOR, and the development of new ‘nearly risk free’ benchmark rates (RFRs).

Currently LIBOR is compiled from data gathered by submitting banks who are asked ‘At what rate could you borrow funds, were you to do so, by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11am?’ That is to say LIBOR is based on estimates provided by banks as to what rate they could hypothetically borrow at.

The FSB recommended changing the approach to calculating LIBOR (and other IBORs) from a submissions-based approach to one based on actual market transactions. ICE, LIBOR’s administrator, has issued consultation papers considering the mechanics of moving to such a system. It is hoped that such a change will strengthen the integrity of the benchmark making it harder to manipulate, ensure that the benchmark is grounded in actual borrowing and is more transparent.

LIBOR is published every day for a variety of currencies and a variety of tenors, for some of those currencies and tenors there will be days with insufficient market liquidity for a benchmark to be published purely by reference to real transactions. ICE’s proposals to deal with the problem of insufficient liquidity ultimately fall back on individual judgment to ensure that the various benchmarks are populated.

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About the author:

Meet Kate:

1. Banking & finance lawyer with experience in syndicated lending and project finance in London, Paris and Sydney

2. Likes yoga, DIY (although the output doesn’t generally reflect the input) and sunny climes

3. Thinks the law is very unlike how LA Law made it look

Kate is a solicitor specialising in banking and finance with particular emphasis on syndicated lending and project finance. She has acted for both borrowers and lenders on a wide range of finance transactions, often involving multiple jurisdictions.

Kate trained and qualified in the Debt and Derivative Securities team at Allen & Overy LLP. She later joined the Banking and Finance team at Freehills (now Herbert Smith Freehills) in Sydney. Most recently, she was in the Projects and Infrastructure team at Norton Rose LLP before joining LexisNexis. Kate is dual-qualified in England and Wales and New South Wales, Australia.