LIBOR changes: what pension trustees should know

Significant changes are taking place to certain inter-bank offered rates (IBORs) commonly used as interest rates in derivatives and other financial contracts. In the UK, LIBOR (the London inter-bank offered rate) is expected effectively to cease to exist after the end of 2021. Regulators and industry groups have recommended that market participants fully transition existing contracts which reference an IBOR to relevant alternative, overnight risk-free rates (RFRs) before this time.

The International Swaps and Derivatives Association (ISDA) has recently issued a protocol (the “IBOR Fallbacks Protocol”) to assist with the amendment of existing derivatives contracts. Future proofing existing non-derivatives contracts, such as bonds or loans, is more complex - the IBOR Fallbacks Protocol cannot be used and bilateral amendment is required.

Pension trustees with direct investments in derivatives or other contracts which refer to LIBOR (or another IBOR) can expect to be asked to accept changes to their contract terms which adopt alternative RFRs and fully transition away from any IBOR before its cessation.

This note explains the IBOR changes in relation to derivatives and highlights the issues trustees with direct exposure to derivatives should consider.

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