With this deadline in mind, Deutsche Bank encourages clients to actively transition legacy positions referencing benchmarks that are being discontinued. “If your company has not acted by now, it’s your last chance to ensure that you are adequately prepared for the end of LIBOR,” says David McNally, IBOR Transition Director for Corporate Bank, Deutsche Bank.

Especially for non-USD contracts, the schedules for amending contracts are getting tight. After the fixings on 31 December 2021, Euro and Swiss franc LIBORs will permanently cease to exist, while the British Pound and Japanese Yen LIBORs can no longer be used as representative benchmarks.

With USD contracts, the situation is only slightly different. The one-week and two-month settings will cease to exist at the end of 2021 as well. Even though the remaining USD LIBOR settings will continue to exist until 30 June 2023, they will no longer be available for use in new contracts. “From the beginning of 2022, Deutsche Bank will no longer transact in new LIBOR referencing products,” McNally states.

For corporates, this means that – if they haven’t done so already – all products based on LIBORs and EONIA must either be actively replaced with alternative Risk-Free Rates (RFRs) (see Figure 1) or robust fallback provisions must be in place.

Figure 1: Moving from LIBOR to alternative RFRs in different jurisdictions

Source: Deutsche Bank and gfma https://www.gfma.org/wp-content/uploads/2019/05/gfma_ibors_to_rfrs_v9-1.pdf as at 2 April 2019

The challenge with fallbacks is that they were historically designed to deal only with a temporary unavailability of a benchmark. “Fallback language therefore may need to be amended to ensure that the permanent discontinuation of LIBOR/EONIA benchmark rates is addressed,” explains McNally. Deutsche Bank encourages clients to actively convert to alternative RFRs instead of relying on fallbacks.

Companies can adhere to the ISDA 2020 IBOR Fallbacks Protocol, which enables fallback provisions to be incorporated into a wide range of legacy derivative contracts referencing LIBOR.¹ However, this does not apply if you have a local contract, such as the German derivatives framework contract (Rahmenvertrag für Finanztermingeschäfte²), or if you are using certain contracts referencing EONIA.

All but the most recent loan products are unlikely to contain a hardwired or robust fallback, and therefore are expected to require amendment. Such specific amendments enable parties to retain control over the economic and legal impact of the transition process. If in doubt, Deutsche Bank recommends that clients contact their relationship managers or loan facility agent as a matter of urgency to agree what needs to be done with their outstanding contracts pegged to LIBOR rates.

Further information on LIBOR cessation can be found in the white paper A Guide to IBOR Transition or here.

Sources

¹ See https://bit.ly/2YOo29N at comisda.org
² See https://bit.ly/3wP3hag at bankenverband.de