The End of LIBOR: Advising Investment Managers on the Transition

Description

Regulators have issued an urgent call for securities and derivatives market participants to evaluate how the imminent demise of LIBOR and entry into an alternative reference rate environment will impact their existing and anticipated contractual arrangements. In a July 12, 2019 statement the SEC highlighted the considerable risks investment managers confront in transitioning away from LIBOR. Likewise, one year earlier, then-CFTC Chair J. Christopher Giancarlo warned that “the discontinuation of LIBOR is not a possibility. It is a certainty.” Since then the CFTC and its Market Risk Advisory Committee (MRAC) have been urging market participants to identify and assess the fallback provisions of their derivatives, securities and other contracts tied to LIBOR.

Investment managers and their counsel must urgently identify, evaluate and, if necessary, negotiate or adapt to the modification of many trillions of dollars of contracts and instruments across a range of cash and derivatives markets to prepare for the potentially complex implementation of new fallbacks and floating rates.

Counsel will need to review and possibly amend legacy contracts that reference LIBOR to reflect appropriate fallback language. For new issuances, market participants should include practical amendment language regarding the transition from LIBOR to an alternative benchmark or adopt alternative reference rates and appropriate fallback language.

Investment management agreements should be reviewed to assess the authority of the investment manager to deal with LIBOR/IBOR replacement and the rights of investors to consent, object, and receive notice of such actions. Offering and deal documents should include disclosures involving the LIBOR transition. Potential valuation issues, basis exposure, repapering issues, and tax and accounting issues must also be addressed with account holders.

The transition away from LIBOR will require significant project management and input from counsel. Considerations include the scope of review and the potential use of AI for large-scale studies, contractual analysis and amendment implementation, regulatory issues, reporting requirements, and client disclosure and interaction. The LIBOR transition may also generate various sources of potential disputes and regulatory scrutiny.

Listen as our authoritative panel discusses the impact of the phaseout of LIBOR on investment managers, investment companies, and other market participants.