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The End of LIBOR: The Twilight Zone™ Edition

The United Kingdom’s Financial Conduct Authority announced the future cessation and loss of representativeness of worldwide LIBOR rates.

Potential Detrimental Developments

Recent Events

On Friday, March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “U.K. FCA”), the regulator of the London Interbank Offered Rate (LIBOR), announced the future cessation and loss of representativeness of worldwide LIBOR rates.[1] As the International Swaps and Derivatives Association (ISDA) has confirmed separately, the ‘spread adjustments’ to be used in its LIBOR fallbacks were fixed on Friday as a result of the foregoing announcement.[2] It is expected that active USD LIBOR rates will cease publication after June 30, 2023 (the “USD LIBOR Transition Date”).

On Tuesday, March 9, 2021, the New York State Senate’s Judiciary Committee unanimously approved Senate Bill S. 297A for consideration on the Senate floor. This legislation, along with the parallel New York State Assembly Bill A.164A, which has not moved out of Committee yet, are collectively referred to herein as the “Proposed New York LIBOR Transition Bills." [3]

The Proposed New York LIBOR Transition Bills are very favorable to the banks and other financial institutions, absolving such entities of any litigation liability providing LIBOR-based products. By providing banks blanket immunity from litigation, these bills minimize, if not eliminate, legitimate litigation against banks by borrowers for the failure of banks to implement the fair and reasonable process envisioned by regulators for the LIBOR transition. See ‘Material Adverse Impacts of Proposed New York Legislation” below.

Ramifications of U.K. FCA/ISDA Announcements

Any borrower who has previously entered into the ISDA Protocol or loan/extension documentation having USD LIBOR as an underlying benchmark, or enters into such documents prior to June 30, 2023 (collectively, the “Locked-In Documentation”), have already locked-in, or will be locking in, Friday’s spread adjustment forevermore.

To clarify, there are two spread adjustments: (i) the spread adjustment that is negotiated with the bank to add to the LIBOR benchmark rate (the “Borrower Spread”) and (ii) the spread adjustment between the LIBOR benchmark rate and the new benchmark rate (the “Benchmark Spread”). Together, the Borrower Spread and the Benchmark Spread aggregate to the “Overall Spread.”

The Borrower Spread should not be changing as part of the LIBOR transition (though it will be built into the changing Overall Spread). However, the Benchmark Spread should be changing to reflect the differences between LIBOR and the alternative benchmark as part of the LIBOR transition.

As mentioned above, for Locked-In Documentation, the Benchmark Spread/Overall Spread was locked-in on Friday and will not change no matter when the Locked-In Documentation is executed.

The pros and cons of an early lock-in are dependent upon whether Benchmark Spreads increase or decrease between March 5th and the USD LIBOR Transition Date, and is best illustrated by the below chart:

   Benchmark Spreads ↑ Benchmark Spreads ↓
Loans Only X
Loans with Swaps X

There are bank desks devoted to pricing of forwards in the financial markets, which is what the early locked-in spread represents. This forward pricing aspect of the Lock-In Documentation is not factored into the new Benchmark Spread.

In addition, it should be noted that (i) in the last few weeks, interest rates have been increasing so, if this trend continues, borrowers can determine, utilizing this chart, whether an early lock-in is beneficial or detrimental to the company and (ii) as swaps constitute the major portion of the LIBOR-based instrument market, banks can determine, also utilizing this chart, whether an early lock-in is beneficial or detrimental to the banks.

End of LIBOR Documentation Rationale

Enumerated below are a sample of reasons that I have heard given by banks for entering into Locked-In Documentation to facilitate the end of LIBOR:

  • Loan documentation is standard across the industry

    It is not standard, even within the same bank, depending upon when the Locked-In Documentation is/was executed.

  • The ISDA Protocol is standard documentation developed by ISDA

    It should be noted that ISDA is a trade organization with banks, insurance companies, diversified financial firms, and energy and commodities firms with over 200 large global institutions as its primary members.[4]

  • Execute the documents, and we’ll worry about the LIBOR transition when it occurs

    As noted above, borrowers are locking in the economics now of a LIBOR transition even though not effective for more than two (2) years.

    Importantly, signing the Lock-In Documentation likely entails the loss of many legal rights and remedies (see ‘ISDA Protocol Concerns’ and ‘Loan Documentation Concerns’ below).

  • The regulators are requiring all of this to be documented by year-end

    Untrue. The regulators are recommending that no new LIBOR-based instruments be entered into after this year. The actual documentation deadline is anticipated to be on or shortly before June 30, 2023.

  • This documentation is to assure the smooth transition from LIBOR to alternative rates as insisted by regulators

    True, though this ‘smooth transition’ is for the benefit of the banks and not the borrowers.

ISDA Protocol Concerns

Outside of the Benchmark Spread timing issue, there are numerous other concerns with borrowers entering into the ISDA Protocol:

  • according to ISDA, it is non-negotiable
  • it is irrevocable
  • it is potentially binding on third-parties not party to the ISDA Protocol
  • the choice of law is England and Wales though existing swap documents are generally governed under New York law, and existing loan documents are generally governed under borrower or bank jurisdiction law
  • it provides broad authority to an agent to bind a borrower counterparty even without explicit authority or even borrower knowledge of the agent’s entering into the ISDA Protocol on behalf of the borrower
  • the spread adjustment is calculated at the sole and absolute discretion of the bank
  • no bank reasonableness requirement
  • disputes are to be decided through an international arbitration tribunal rather than a U.S. court of law[5]

However, much of the foregoing may be unenforceable under New York law.

Loan Documentation Concerns

There are many problems with ‘standard’ loan documentation including, but not limited to:

  • bootstrapping the ISDA Protocol’s Benchmark Spread language into loan documents
  • documentation not following the Alternative Reference Rates Committee (ARRC) recommendations[6]
  • absence of any provision requiring the bank to act in a commercially reasonable manner
  • all calculations being made at the sole and absolute discretion of the banks – crucially the new overall interest rate
  • specific disclaimers that the bank has no obligation to provide the same value of economic equivalence prior to and subsequent to the LIBOR transition

The last bullet is particularly troubling as economic equivalence is the intent of the regulators for the ‘smooth transition’ of LIBOR.[7]

Material Adverse Impacts of Proposed New York Legislation

Most swap documents in the U.S. are governed by New York law so this legislation is critical for swaps, as well as loan documents governed under New York law. Interest rate swaps constituted 95% of LIBOR-based instruments in 2017.

Background - Prior LIBOR Manipulation

In 2012, news broke that Barclays Bank had manipulated LIBOR, forcing the immediate resignation of the President and Chair of the bank. Later that year, multiple other international banks were implicated, leading to aggregate settlements in the billions of dollars with numerous regulators worldwide including, but not limited to (i) in the U.S., the Commodity Futures Trading Commission (CFTC), the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI), the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC), (ii) outside of the U.S., the Financial Services Agency of Japan, the U.K. FCA, the U.K. Serious Fraud Office and the Swiss Financial Market Supervisory Authority, and (iii) in the States, the New York State Department of Financial Services (DFS), the New York State Attorney General’s Office (NYAG), and most of the country’s other state attorney generals.

In addition, multiple class action lawsuits were filed worldwide, much of which had been consolidated in the Southern District of New York (SDNY). These lawsuits involved alleged manipulation by the banks of LIBOR as well as other types of market manipulation (e.g., currencies, commodities).

Proposed Legislation

Yet, despite these regulatory and litigation actions, or maybe due to such actions, the Proposed New York LIBOR Transition Bills grant immunity to banks for any actions during the LIBOR transition including, in particular, any future manipulation.

With the passage of these bills and the contemplated loan/swap documentation for the LIBOR transition, no borrower (i) can unilaterally terminate or suspend performance under any contract for any reason, (ii) consider the LIBOR transition a breach of contract, or (iii) void or nullify any contract. This includes, in particular, a new interest rate index manipulated by the banks or a new interest rate spread that is materially different from the rate in place prior to the transition, thus constituting a material change in contract economics for such entities, likely in violation of the U.S. Constitution’s Contracts Clause.

Adverse Economic Impact on Borrowers

Without the Proposed New York LIBOR Transition Bills, adverse economic impacts will be borne, depending upon the circumstances, by the banks and/or the borrowers.

However, with these bills, adverse economic impacts will be borne only by the borrowers and borrowers will have no remedy if the banks manipulate the new interest rate indices or establish disadvantageous new interest rate spreads. It should be noted that, based upon template documents rolled out by various banks that I have reviewed, both the new indices and the new spreads are determined at the sole and absolute discretion of the banks.

Based upon recent prior history, these bills could have a materially adverse financial impact on the following entities throughout the country (and the world):

  • Governmental entities
  • Small and large companies
  • Regional and community banks
  • Not-for-profit corporations, including hospitals and colleges/universities
  • Importantly, individual borrowers

The provisions of the proposed bills are particularly troubling since all of the foregoing entities and individuals are trying their best to deal with the resultant economic dislocations caused by the pandemic. As a result, such entities do not have the bandwidth (or expertise) to deal with material changes to their financial contracts that could damage each such entity by millions of dollars. In the aggregate, these changes could cause billions of dollars in damages, if comparable to the damages caused by interest rate manipulations in the recent past.

‘Smooth Transition’

As part of its “Key Legislative Principles,” ARRC believes that the legislative text specifically set out within ARRC’s draft New York State legislation is ‘the approach best tailored for the smooth transition of USD LIBOR contracts.’ (emphasis added)

The Twilight ZoneTM

The situation of borrowers during the LIBOR transition is best explained by a classic episode of the Twilight Zone™[8]:


Our intentions are honorable. We desire, above all things, to help the people of Earth.

*     *     *

We will not force anything on you. You will take only that which you choose to take.

[in response to the France UN representative’s inquiries]

*     *     *

There is nothing ulterior in our motives, nothing at all.

We can show you, for example, [how to] end famine on Earth for good and all.

We ask only that you trust us. Only that you simply trust us.

[in response to the Soviet Union UN representative’s inquiries]

*     *     *

After these messages are delivered to senior leaders at the United Nations, the alien leaves a book in an indecipherable language on a table.

The task is for two (2) decoding specialists for the U.S. Government, Mr. Chambers and, his very able assistant, Patty, to lead the efforts to translate the book.

Patty (interrupting Mr. Chambers conferring with two Army Colonels skeptical of the alien’s motives):

We’ve licked the title anyway.

[Handing the book to Mr. Chambers with an index card]

Mr. Chambers

I call that a reasonably altruistic phrase. Do you agree Patty?


Well, I want to believe it. But … I don’t know what to think.

Lead Colonel (being handed the book by Mr. Chambers with the index card alongside the indecipherable title)

‘To Serve Man.’  I hope so. I fervently hope so.

*     *     *

A year later, when all famine (and warfare) on Earth has ended.

Patty (to Mr. Chambers)

I’m still working on that book.

It’s starting to fall into place now. I think I’ll get the answer eventually.

Mr. Chambers, like thousands of others, decides to visit the alien planet. Patty hurries to the spaceship as he is about to board the ship:

Patty (to Mr. Chambers)

Mr. Chambers, don’t get on that ship! The rest of the book, ‘To Serve Man,’ it’s…it’s a cookbook.


Hopefully, borrowers understand the ramifications of entering into ‘standard’ End of LIBOR documentation and legislators understand the implications of passage of the proposed New York legislation before becoming the banks’ next ‘bill of fare’… [9]

[Cue The Twilight Zone theme music]

[1] See ‘FCA announcement of future cessation and loss of representativeness of the LIBOR benchmarks.’

[2] See the related U.K. FCA Press Release.

[3] As the prior bills were just modified, this Client Alert addresses only the prior versions of the bills and the Governor’s Budget Bill related to the LIBOR transition.

[4] See ISDA website.

[5] Also see Client Alert entitled ISDA 2020 LIBOR Fallbacks Protocol,’ dated October 26, 2020.

[6] I have yet to see those recommendations followed in any document.

[7] Also a requirement under certain Internal Revenue Service regulations which will be the subject of a future Client Alert.
[8] Trademark of CBS Broadcasting Inc. All references herein are to the episode entitled ‘To Serve Man’ originally broadcast by CBS on March 2, 1962 (Season 3).
[9] Respectfully submitted, for your perusal, the original sponsor of this Twilight Zone episode was ChesterfieldTM, a cigarette brand, not limiting the direct applicability of this episode to the banking industry.

Additional Analysis

USD LIBOR Transition Delayed to 2023/LIBOR Transition Resources

Everything you need to know to be prepared for the LIBOR-SOFR transition.

ISDA 2020 IBOR Fallbacks Protocol

The LIBOR transition should, and can, take place in a fair and reasonable manner to assure the integrity of worldwide financial debt markets.

Recent Swap Manipulation Cases

In recent years, the Commodity Futures Trading Commission (CFTC) filed two actions with facts so shocking the reader is forced to ask, ‘can this be how the industry really functions?’


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