Lawyers concerned over possible changes to Libor calculation

As a Libor review by the U.K.’s Financial Services Authority comes to a close, lawyers have begun to voice concerns related to how reform of the benchmark could affect existing financial contracts.

Commercial lawyers, though welcoming efforts to increase transparency and integrity in the rate-setting process, have also said that changing the way Libor is calculated could create confusion. Libor is a key benchmark rate used to price many financial products and services.

“It’s potentially massive,” Marek Petecki, a partner at the law firm Bristows, said, according to CNBC News. “It’s hard to quantify how many contracts there are out there that refer to Libor, as many (if not most) of them are private, but you’re talking about thousands and thousands of contracts.”

Investors have also recently voiced similar concerns about how reforming Libor could create market confusion.

“The main issue is the uncertainty changes would create, because it is very difficult to get a very clear picture of the extent of Libor-linked obligations,” Tim Strong, a partner at the international law firm Taylor Wessing, said, CNBC News reports. “It is a big issue because Libor appears in so many contracts, and it has become built into contracts over such a long range of time.”

Martin Wheatley, the managing director of the FSA, is heading the Libor review. His suggestions include eliminating Libor and replacing the rate with one based on actual trades, though he has said that the review would consider the consequences of inquiry recommendations to pre-existing contracts.

Many Libor concerns relate to commercial lending, particularly in the area of interest rate swaps, in which the rate is expressed as “Libor plus X percent.” Petecki said that altering the way Libor is calculated would move “the goalposts of the commercial deal,” according to CNBC News.

Some groups also said that altering the Libor calculation could make it more difficult for banks to price risk in lending, which could be exacerbated by uncertainties surrounding a new Libor calculation.

“Trade sizes and trading levels will vary, day to day and from bank to bank, so it’s not as though you can take a nice, clean snapshot of each bank’s borrowing costs at a particular point in time,” Petecki said, CNBC News reports. “It’s difficult to see how you can completely remove human judgment from the process.

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