On Wednesday 8th September, the Critical Benchmarks (References and Administrators' Liability) Bill had its first reading in the House of Lords. This is the proposed legislation we have been waiting for in the UK for many months ever since the ARRC mooted it for the US, and in particular since 16th February, when the FCA issued a consultation on the idea and it is the cousin of New York legislation and US federal legislation aimed at the same problem; and as readers know, the EU is considering something similar too.
The Bill is designed to ensure that parties to tough legacy contracts wanting to use the replacement of LIBOR by a synthetic LIBOR as an excuse to cause trouble – arguing breach, or termination or force majeure as a way of reneging on their obligations for example. So, if and once the Bill becomes law, a new Article 23FA in the UK Benchmarks Regulation will provide that English (and Scottish and NI) law contractual references to a designated “Article 23A benchmark” [meaning LIBOR] will refer to the relevant “synthetic LIBOR” which will be introduced by 31st December 2021. The synthetic LIBORs will be based on an RFR plus a credit adjustment spread, rather than on actual rates established by inter-bank transactions (or, increasingly in recent years, estimates of what these rates would be) but Article 23FA will rule out this being argued as a fundamental change leading to frustration, force majeure etc.
The Bill does not however apply to contractual fallback clauses which already address the move to a replacement rate in the event of LIBOR’s demise (but where the fallback clause is triggered by the cessation or unavailability of LIBOR, it would not be triggered at the point where LIBOR becomes synthetic LIBOR). The Bill also contains protections for benchmark administrators, which will be legally obliged to produce synthetic LIBOR, and had requested immunity from claims for damages as a result of them producing a synthetic Article 23A benchmark.
Accompanying the Bill are “Explanatory Notes” which contain a handy LIBOR history for anyone still in the need for one.