Benchmarks LIBOR transition Tough Legacy Contracts
In addition to the issues set out in the previous section, there is a particular problem with contracts that cannot transition away from LIBOR. In anticipation of the potential withdrawal of panel bank submissions to LIBOR after the end of 2021, the FCA expects firms to actively transition financial contracts and financial instruments referencing LIBOR to alternative benchmarks before the end of 2021.
	However, some contracts, particularly in cash markets (i.e. loans, securitisations, mortgages and commercial contracts), face significant barriers to moving off LIBOR. These contracts are called ‘tough legacy’ contracts. There are also some LIBOR-referencing ‘non-financial contracts’, such as leases or consumer loans, that face the same problems.
	Furthermore, some of these tough legacy contracts do not have "fallbacks", which are provisions that could be activated in the event that LIBOR were to cease to be available, such as switching to a specified alternative benchmark. Without a fallback, these contracts therefore would be at risk of claims of frustration, which means that contractual obligations could end if the obligations were found to have been fundamentally altered. Some tough legacy contracts contain inappropriate fallbacks as they are designed to cater for the short-term unavailability of LIBOR instead of its permanent cessation and can lead to impracticable results.
	Often, tough legacy contracts are multilateral and involve obtaining the consent of multiple parties before a change to the contract can be enabled. In some cases, achieving consensus on the changes is likely to be difficult or impossible due to the number of parties involved, or due to the threshold of consent that must be achieved for the contract to be changed.
	Given these challenges, UK regulators believe that there will be an irreducible core of tough legacy contracts that cannot transition away from the use of LIBOR by end-2021. These contracts could be at risk of frustration in the event of LIBOR cessation. Cessation could result in widespread legal disputes between parties to these contracts, including where a party is dissatisfied with the operation of an inappropriate fallback.
	The Working Group on Sterling Risk-Free-Rates issued a ‘Tough Legacy Report’ (Working Group on Sterling Risk-Free Reference Rates, ‘Paper on the identification of Tough Legacy issues’, May 2020) in May 2020 which recommended that a legislative solution would be needed to assist these contracts.
	On 23 June 2020, in a written statement (Chancellor of the Exchequer, ‘Financial Services Regulation’, 23 June 2020) to Parliament the Government announced its intention to bring forward measures to amend the BMR.