LIBOR transition remains fraught with risk

Publication of most LIBOR rates will be discontinued at the end of this year. The effects on financial contracts, which refer to a discontinued LIBOR rate to determine a payment obligation and which have a term that runs beyond discontinuation, are unclear and may depend on the facts surrounding the individual contract. Legislators in key interbank markets have adopted or are in the process of adopting legislation governing LIBOR discontinuation and its legal effect on affected contracts. Switzerland is not adopting such legislation. As a consequence, the situation of parties to affected contracts governed by Swiss law remains unclear, and both sides are exposed to significant (litigation) risk.

By Thomas Werlen / Jonas Hertner / Dusan Ivanovic (Reference: CapLaw-2021-32)

1) Introduction

After almost four decades of playing a prominent and essential role in financial markets worldwide, the London Inter-bank Offered Rate (“LIBOR“) is coming to an end: in December 2021, most of the LIBOR rates will either cease to be published (all CHF and EUR LIBOR settings as well as certain USD and most GBP LIBOR and JPY LIBOR settings) or be published on a “synthetic” basis, i.e. based on a changed methodology (certain GBP and JPY LIBOR settings). For certain USD LIBOR settings, the date of discontinuation has been pushed back to end of 2023, allowing parties more time to adjust.

The discontinuation of these popular reference rates is a consequence of widespread LIBOR manipulations and a significant decline in interbank market liquidity. Regulators around the globe reached the view that LIBOR rates should make way for alternative benchmark rates. Following recommendations by the Financial Stability Board in 2014, national working groups in the relevant markets started developing and identifying successor “risk-free” benchmark rates. These efforts further accelerated in 2017, when Andrew Bailey – then chairman of the UK Financial Conduct Authority – announced the de facto end of the LIBOR at the end of 2021. 

The transition from LIBOR to alternative, risk-free reference rates is not set to be risk-free itself. In fact, market participants, industry experts and global regulators are expecting waves of litigation arising from disputes regarding tough legacy contracts – contracts which refer to a LIBOR rate, have a term extending beyond discontinuation and do not contain provisions governing the legal effects of discontinuation. Michael Held, General Counsel to the New York Federal Reserve Bank went as far as noting that “This is a DEFCON 1 litigation event if I’ve ever seen one.” (

Risk of litigation is expected to be particularly high in jurisdictions that do not provide for statutory fallback scenarios, and in situations where one party to a LIBOR-based contract sees itself potentially at a significant financial disadvantage. While certain jurisdictions, notably the State of New York and the EU, have adopted LIBOR discontinuation provisions, and others, such as the UK, are considering doing so, Switzerland is not doing so. This is despite the fact that FINMA, in its “Risk Monitor 2019”, has identified the risks stemming from the discontinuation of LIBOR as one of the six principal risks for the Swiss financial center and its participants, and later, in its Guidance 10/2020 regarding the “LIBOR transition roadmap”, urged supervised institutions to “act now” and take all necessary preparatory actions for the transition.

2) LIBOR discontinuation legislation being adopted in key jurisdictions

A central aspect of LIBOR discontinuation are risks emanating from tough legacy contracts. Such contracts are silent regarding the LIBOR discontinuation and therefore will have to be amended, either by mutual agreement of the parties or, in case of dispute, by the court. The present contribution focuses on discontinuation legislation projects in several jurisdictions as well as related aspects under Swiss law specifically (see sec. 3 below).

When LIBOR is discontinued, market participants will face legal uncertainty and adverse economic impacts on thousands of affected financial contracts, including mortgages, loans, business contracts, and securities. To mitigate the risk of economic disruption, the State of New York and the EU have adopted legislation governing the transition, specifically addressing tough legacy contracts. At the same time, the UK is debating a draft law seeking to achieve the same effect.

– In the US, New York State enacted a bill to amend the uniform commercial code and provide for a safe harbor from “costly and disruptive” litigation for the use of the benchmark replacement recommended by the Federal Reserve Board, the Federal Reserve Bank of New York or the Alternative Reference Rates Committee and to establish that the replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR. Parties are prohibited from refusing to perform contractual obligations or declaring a breach of contract as a result of the discontinuance of LIBOR or the use of a replacement ( 

– In the EU, in February 2021, the European Council amended the EU Benchmark Regulation. The amendments will allow the European Commission to designate statutory successors for affected reference rates. This will include the replacement for the reference rate itself, a spread adjustment as well as further potentially necessary measures. The amended EU Benchmark Regulation entered into force on 13 February 2021 (

– In the UK, the legislator is currently debating a proposal for a Financial Services Bill seeking to achieve essentially the same effects and powers for the UK regulator as the EU’s amendments to the EU Benchmark Regulation (

All of these legislation efforts specifically address risks emanating from tough legacy contracts after legislators recognized that leaving these risks unaddressed creates significant uncertainties for market participants, including retail end-users of LIBOR-based contracts.

3) Switzerland’s lack of LIBOR discontinuation legislation leaves
the fate of contracts to the parties’ ability to find consensus –
and to courts

Switzerland has chosen not to introduce LIBOR discontinuation legislation. The “National Working Group on Swiss Franc Reference Rates” (“NWG“), which is leading the LIBOR transition efforts in Switzerland operates under the auspices of the Swiss National Bank and provides a forum for regulators and market participants to discuss reference rate-transition developments and issues recommendations to industry participants, has not called for such legislation.

Switzerland’s lack of LIBOR discontinuation legislation means that parties to tough legacy contracts must find ways to a mutual consensus on the legal effects of the LIBOR discontinuation on their contracts (cf. para. a) below). If the parties are unable (or unwilling) to reach consensus, the consequences for individual tough legacy contracts remain unclear and largely fact-dependent (cf. para. b) below).

a) Parties to tough legacy contracts are well advised to assess their situation and contractual obligations

Following the warning shots by FINMA fired in its Risk Monitors and its Guidances, which set a strict timetable for market participants to achieve transition milestones, banks have begun reaching out to counterparties. With respect to non-bank, end-user counterparties, these efforts typically consist in asking counterparties to agree to amendments to incorporate an alternative reference rate as a fallback rate in the event of LIBOR discontinuation. FINMA urged banks to reach out to affected counterparties by end of March 2021, and most counterparties will have received such correspondence from their bank by now.

In an evaluation of self-assessment questionnaires completed by banks, FINMA found that the greatest portion of affected contracts are OTC derivatives, followed by credit agreements. Both types of contracts to a large extent use standardized documentation (standard language, model agreements). While the loan market is dominated by bank-proprietary standard agreements, in the OTC derivatives market the use of industry-wide highly standardized master agreements prevails (i.e. the 1992 and 2002 ISDA Master Agreement by the International Swap Dealers Association [“ISDA“] and the 2003 and 2013 Swiss Master Agreements [“SMA“] by SwissBanking). 

Under the 1992 and 2002 ISDA Master Agreement, the 2006 ISDA Definitions are relevant for LIBOR-linked derivatives. As of 25 January 2021, a fallback mechanism has been added to these definitions, which will henceforth apply to derivatives transactions that refer to the 2006 ISDA Definitions. Furthermore, ISDA provides the ISDA IBOR Fallback Protocol. These precautionary actions, coupled with the fact that ISDA Master Agreements are governed by either English or New York law, which already have or will have LIBOR discontinuation legislation, mean that risks arising from legacy contracts will largely be mitigated.

The situation is quite different for contracts governed by Swiss law, including contracts entered into under the SMA. SwissBanking has published its own model Amendment Agreement on Reference Rates as well as Supplementary Definitions on Interest Rate Derivatives, Reference Rates and EONIA to a Swiss Master Agreement for OTC Derivatives (2003 and 2013) which may be agreed upon by parties to derivatives contracts. In the event that parties are unable to reach a consensus, there will not be a statutory fallback position.

As a result, it is advisable for parties to tough legacy contracts, in particular if the contract is governed by Swiss law, to consider their position carefully before signing amendments suggested by banks. There may be scenarios, in particular in light of the negative interest rate situation, where parties may prefer to reassess their benchmark rate-referenced contracts as a whole to avoid significant uncertainties and potential losses. 

b) Potential scenarios under Swiss law in case of dispute

While it is advisable to strive for a consensual solution, parties to a tough legacy contract under Swiss law may fail to reach an agreement on the legal effects of the discontinuation of the referenced rate. Such scenario, as feared by European and US regulators and legislators alike, may arise when the parties disagree on the replacement rate, or even whether or not the contract shall continue. In such a case, the fate of the tough legacy contract may end up being determined in the courtroom.

Again, tough legacy contracts are characterized by the fact that they do not account for an answer to the question “what happens if the reference rate ceases to exist?” In case of a dispute, the answer shall be given by the court pursuant to the established rules of contract interpretation and amendment. 

Accordingly, when interpreting the terms of a tough legacy contract, the court will – as a starting point – consider the contract’s wording, which may be inconclusive. The court will then assess the circumstances under which the contract was concluded, i.e. the negotiations of the parties, the purpose of the agreement or the time of the conclusion of the contract. To what extent a dispute may be resolved through the means of interpretation is going to be determined on a case by case basis. 

The court may find that the tough legacy contract cannot be cured by contract interpretation – in such a case the court may amend the tough legacy contract applying non-mandatory law and the hypothetical intent of the parties. The amendment of tough legacy contracts, too, will depend on the facts of each case (and – for that matter – the evidence presented by the parties). Whether or not some non-mandatory rules such as art. 314(1) of the Swiss code of obligations (“CO“) are applicable to LIBOR loans is unclear, and legal doctrine is inconclusive.

The discontinuation of LIBOR is – as evidenced by the legislative efforts in the US, the EU and in the UK – an extraordinary event, comparable in its impact to the introduction of the EURO and the replacement of the European predecessor currencies. Swiss law provides for certain provisions which address such extraordinary events and form exceptions to the pacta sunt servanda principle. 

A court may find that LIBOR discontinuation leads to an impossibility to perform pursuant to art. 119 CO. A court may also find that discontinuation leads to a situation that is fundamentally different such that it allows parties to terminate the tough legacy contract extraordinarily on the basis of clausula rebus sic stantibus.

A court may also find based on the circumstances that the parties had an intent to replace the LIBOR with a successor rate and the tough legacy contract can continue to be performed. In such a case, the sole risk is lengthy and costly proceedings. However, if any of the (rather “high risk”) scenarios described above applies, the parties will not only lose time and money on the proceedings but also possibly on the merits. That such “high risk” scenarios are not only of theoretical nature is, yet again, evidenced by the EU and New York legislation, experts’ statements and lastly the alerts by FINMA. Against that background, parties will generally want to reach a consensual solution. 

4. Conclusion and recommendations 

LIBOR discontinuation creates significant uncertainties for parties to tough legacy contracts. In jurisdictions with specific LIBOR discontinuation legislation risks emanating from these uncertainties are significantly lower than in jurisdiction without a statutory fallback position, such as Switzerland.

In Switzerland, affected parties who cannot agree on the legal consequences of the (now impending) LIBOR discontinuation may be heading for court proceedings with an unclear outcome. In the extreme scenario it is conceivable that the originally agreed (monetary) consideration may no longer be due.

In order to assess the legal risks, it is therefore imperative to analyze the existing stock of LIBOR-related contracts including the circumstances surrounding the conclusion of these contracts and the documentation, in order to prepare for (re-)negotiations or possible civil proceedings. 

Where possible contractual amendments should be sought based on consent of the parties involved, such as the transfer of LIBOR contracts into fixed-rate agreements or a termination by mutual consent, and in the words of FINMA in its “Risk Monitor 2020”: “there is no time to lose“. At the same time, parties should however not rush into such amendments without a careful assessment of their risks (or opportunities).

Thomas Werlen (
Jonas Hertner (
Dusan Ivanovic (