15 February 2021, HM Treasury launched a consultation titled “Supporting the wind-down of critical benchmarks”. On 21 October 2020, the government introduced the Financial Services Bill to Parliament. This Bill includes amendments to the Benchmarks Regulation (BMR), which provide the FCA with new and enhanced powers to oversee the orderly wind-down of critical benchmarks, such as LIBOR.
The consultation is in response to stakeholder suggestions of a legal safe harbour, in respect of legacy contracts referencing a benchmark subject to these new powers. The consultation has particular reference to the situation where a benchmark is deemed to be unrepresentative under (amended) BMR Art. 23A and is therefore subject to a change in methodology under Art. 23D. The legal safe harbour could have the following suggested characteristics:
- Application to legacy contracts e.g. those made before the announcement of an Art 23A designation (benchmark non-representativeness)
- The provision of legal certainty that references to benchmarks would remain unchanged
- The provision that a 23 A designation or an Art. 23 D change to methodology cannot constitute a cause for action, liability or grounds for litigation between the contracting parties. In particular, either or both will not have the effect of:
- Discharging or excusing performance, including the triggering of force majeure or other provisions that alter obligations and/or liabilities
- Granting any party the right to unilaterally terminate or suspend performance
- Constituting a breach of contract
- Voiding any contract
- Amending, modifying or novating any contract
- Constituting grounds for liability against a facility/calculation agent in their performance of their obligations
Accordingly, the consultation seeks to understand the potential legal uncertainty following an action under Art. 23 and the consequent grounds for possible legal action. If respondents consider a safe harbour would be useful (suspect this is a slightly rhetorical question), the consultation seeks further details as to the safe harbour’s potential scope in respect of: transaction types, specific rate reference, governing law, interaction with existing fallback provisions and the application of legal immunity to benchmark administrators.
Many firms have only just closed the books on provisioning and paying for swap mis-selling. The ubiquity of LIBOR and other benchmarks, combined with the inevitable informational asymmetry of XYZ MegaBank facing anyone but another dealer, has naturally raised the spectre of LIBOR-related litigation. A consultation is far from a proposal, and a proposal falls short of concrete effect, but we can see the outline of a legislative solution which would reduce legal uncertainty and allow for an interim period in which a “synthetic LIBOR” may be applied to tough legacy contracts.
The consultation closes on 15 March 2021.Contact Us