Is LIBOR's legal backlog starting to kick in?

The real USD-LIBOR disappearance came at the end of June 2023. As the discontinuation was clumsily implemented a “synthetic” LIBOR was required and was published until 30 September 2024.

To our opinion, this was a fundamental mistake as we explained in the post “Synthetic LIBOR, genuine manipulation".

Now that the synthetic LIBOR period has ended, the real legal legacy for LIBOR can start. It seems that once more the court battle is rigged in favour of power in place by opposition to financial reality. We referenced the Bank of England rigging the LIBOR setting and later the trials of those involved in the setting in our post “Rigged: part 1 - Will there be a part 2?”

Now it appears that a discussion between private individuals (ISDA) about a new convention for new derivative trades is becoming a law for all on previously issued securities. The story is described in a Reuters article “StanChart welcomes 'clarity' from UK court ruling over replacement rate for Libor”.

The article indicates that:

“Standard Chartered wanted to change the three-month U.S. dollar Libor rate that was used to set dividends on some preference shares to one based on the Secured Overnight Financing Rate (SOFR).”

“The court ruled that SOFR was a "reasonable alternative rate".”

“A spokesperson for the funds' lawyers at Quinn Emanuel said in a statement that the ruling "enables Standard Chartered to impose a fundamentally different commercial bargain on its investors from what had been agreed"”.

I strongly disagree with the court and fully agree with the last sentence. This is what I demonstrated in an article in 2020, some of which was published in Risk.Net “Signing the Libor fallback protocol: a cautionary tale“. The preprint version of the article is available on SSRN: https://ssrn.com/abstract=4991976.

The compounding SOFR fallback was designed without fairness in mind, only simplicity from a legal perspective. This was enough for new trades as people entered into an agreement knowing all its terms and conditions. The SOFR plus ISDA spread replacement was never designed as a “reasonable alternative rate”, it is only an “alternative rate”.

Any proposal to change from LIBOR to SOFR plus spread must be supported by an in-depth analysis of the impact in terms of valuation and risk management. Any change requires the consent of all parties involved.

I'm available to act as an expert related to the "in-depth analysis of the impact in terms of valuation and risk management". You can review some of my past analysis in this context on my muRisQ professional blog: http://murisq.com/

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