LIBOR: The World’s Most Important Headache
By Alec Foote Mitchell. Full Text.
The London Inter-Bank Offered Rate, or LIBOR, is known as “the world’s most important number.” Referenced in almost $350 trillion of financial contracts, LIBOR is central to modern finance. But in 2023, it is vanishing. As central banks, governments, financial institutions, and private parties rush to find replacement rates, a long-term threat has emerged. Legacy financial contracts, those that still reference LIBOR past its discontinuation in 2023, have not all been resolved. Some contracts work themselves out with “fallback language” to move to a new rate. But trillions of dollars of contracts have either no fallback language or provisions unworkable in reality.
This Note traces LIBOR’s history, including the need for reference rates and potential alternatives to LIBOR. It then explores the scope of U.S. dollar (USD) LIBOR legacy contracts, outlining the potential consequences of inaction, the general types of contracts affected, and common contractual language. Finally, this Note proposes a three-tiered solution to solving the USD LIBOR legacy contract issue. First, contracts with clear and workable fallback language should be left alone. Second, parties to contracts with no fallback language should be given until 2023 to find a solution, after which legislative action would mandate a replacement rate. Lastly, parties to contracts with unworkable fallback language should have until 2023 to amend their agreements, after which they must either accept legislation replacing USD LIBOR or enter mandatory settlement conferences and potential litigation in front of courts with additional equitable powers. This Note’s solution balances the necessity for bold action to prevent economic fallout with the limits imposed on interference in private contracts under the U.S. Constitution. One thing is certain: the window for action is closing fast.