How Hedge Fund Managers Can Prepare for the Anticipated “End” of LIBOR

Andrew Bailey, Chief Executive of the U.K. Financial Conduct Authority, called into the question the future of the London Interbank Offered Rate (LIBOR) in a July 27, 2017, speech. While the current panel banks for LIBOR have agreed to sustain the benchmark in its present form until 2021, Bailey stated that thereafter the “survival of LIBOR on the current basis, as a dynamic benchmark based on daily submissions and updates, could not and would not be guaranteed.” In his December 11, 2018, testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, SEC Chair Jay Clayton highlighted the transition away from LIBOR as an emerging market risk that is being closely monitored by the SEC. Given LIBOR’s pervasive use by hedge funds and other market participants, the consequences of its permanent discontinuation will be felt – for better or worse – throughout the financial markets, and a misstep could affect investors worldwide. In a guest article, Anne E. Beaumont, partner at Friedman Kaplan Seiler & Adelman, discusses the possible consequences for derivatives transactions that involve USD LIBOR and are governed by ISDAs, while also suggesting five steps that advisers can take today to prepare for this impending change. For additional commentary from Beaumont on derivatives documentation, see “The 1992 ISDA Master Agreement Says Notice Can Be Given Using an ‘Electronic Messaging System’; If You Think That Means ‘Email,’ Think Again” (May 23, 2014); and “Five Steps for Proactively Managing OTC Derivatives Documentation Risk” (Apr. 25, 2014).

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