The Critical Benchmarks Bill – latest piece of the LIBOR cessation jigsaw

On 8 September 2021, the Critical Benchmarks (References and Administrators’ Liability) Bill (the CBRAL Bill) had its first reading in the House of Lords.

The CBRAL Bill is designed to support the effective operation of the powers granted to the Financial Conduct Authority under the Financial Services Act 2021 and is a key aspect of the legislative and policy framework to manage the end of LIBOR.

It introduces new articles to the Benchmark Regulations (BMR) to supplement Article 23A of the BMR. That article gave power to the FCA to designate as “critical” a benchmark which it determines no longer accurately represents the underlying market, prohibiting its ongoing use in financial contracts and instruments, except where specifically exempted.

Key points of the CBRAL Bill

• Under Article 23A of the BMR, the FCA has the power to compel the administrator of a benchmark to continue to publish the benchmark rate (potentially using a new methodology for its calculation) for up to 10 years after cessation – a so-called “synthetic rate”. The CBRAL Bill introduces a new Article 23FA, which provides that where a legacy contract is exempt from the general prohibition on the use of LIBOR after its designation under Article 23A then any contractual references to LIBOR are to be treated as references to “Synthetic LIBOR” (Article 23FA paragraph 1).

• Paragraph 5 of Article 23FA states that once Synthetic LIBOR has replaced LIBOR, the contract or any other arrangement will be treated as if it had always referenced Synthetic LIBOR unless the contract expressly provides otherwise. That seeks to prevent arguments from parties that it was not their intention that their agreement included the use of Synthetic LIBOR.

• Recognising that it is not just financial contracts and instruments that are affected by the end of LIBOR, new Articles 23FA and 23FB will apply to any reference to LIBOR in all contracts and other arrangements regardless of whether the contract or arrangement falls within the definitions set out in Article 3 of the BMR (i.e. where one of the parties is a FCA supervised entity). In other words, Synthetic LIBOR will become the reference rate in commercial contracts and leases that reference LIBOR (where they have not already been transitioned to another rate). The new provisions will apply to any contract or arrangement made under the laws of England, Wales, Scotland or Northern Ireland.

• Paragraphs 3 – 5 of Article 23FB supports the FCA’s consistent position that parties should transition all contracts, where possible. They provide that where a contract or arrangement has a fall-back clause, it will not be affected by the provisions in Article 23FA, except where it would have been triggered when LIBOR ceases to exist or is otherwise unavailable after the FCA exercises its power to designate the benchmark under Article 23A or the methodology changed under Article 23D.

• In contrast to the approach in the United States, there is no “safe harbour” provision to shelter parties from litigation where they have relied upon the provisions of the CBRAL Bill. However it does seek to prevent contracting parties (where the contract was entered into or varied before LIBOR is designated under Article 23A) from arguing that reliance on Synthetic LIBOR is a breach of contract, that there has been a material change to the contract, or that the contract has been frustrated. Paragraph 6 of Article 23FA provides that the deeming provision in Article 23FA shall not give rise to any new claims between the parties in relation to any act or omission that is relevant to the formation or variation of a contract prior to the designation of a critical benchmark. The example given in paragraph 6 is an act or omission in connection with the making of a representation or the giving of advice prior to formation of the contract, which did not reflect the effect of Article 23FA on references to LIBOR.

Commentary

Certainty and assurance are two factors the CBRAL Bill is intended to provide to parties where their contractual arrangements involve references to LIBOR and where it has not been possible to agree a switch to an alternative benchmark rate before the end of 2021.

The deeming provision, that a reference to LIBOR shall be treated as a reference to Synthetic LIBOR after the end of 2021, certainly provides the route to this desired certainty. What remains to be seen, however, is the definition of which tough legacy contracts will benefit from the new Article 23FA provisions. The results of the FCA’s consultation on which legacy contracts will be exempted from the prohibition on the use of LIBOR is expected in the next few weeks.

Finally, although the CBRAL Bill has sought to limit the scope of potential claims by customers following the transition, it does not prevent arguments from customers that they are paying more on their replacement rate than they were on LIBOR.  With uncertainty remaining on scope of the contracts benefitting from the legislative solution, it is surprising that the CBRAL Bill does not include provisions (similar to those in the US’s equivalent legislation), preventing such claims.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at September 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions