LIBOR transition remains a fundamental issue confronting financial markets. Regulators in both the United States and Europe have expressed the view that the discontinuation of LIBOR is a virtual certainty, and that market participants should plan accordingly. The official sector of regulators and central banks has continued to stress the need to develop robust alternative reference rates and robust contractual fallbacks in the event that LIBOR were to cease or become unrepresentative of underlying financial reality, and to transition to such alternative rates.

Market participants have been actively involved in examining alternatives to LIBOR and other interbank offered rates (IBORs), and have also considered adding fallback provisions to new debt contracts and amending legacy debt contracts to add such fallbacks.

In November 2018, the Financial Stability Board (FSB) issued its 2018 progress report on reforming interest rate benchmarks. In that report, the FSB noted that a great deal of progress had been made since 2017 to identify risk-free rates (RFRs) and other alternative reference rates and, in some markets, to begin to transition to identified RFRs. The FSB report also noted work currently being done to enhance contractual robustness through the implementation of fallbacks. The FSB report explicitly stated that "FSB member authorities consider that transition away from LIBOR is necessary, across the five LIBOR currencies (USD, EUR, JPY, GBP and CHF); it should be presumed that LIBOR will not be sustainable."

Our report examines developments that have occurred in 2018 with respect to derivatives, syndicated lending, securitization and the bond markets, in the jurisdictions of each LIBOR currency. Several major consultations were launched by ISDA and by working groups with respect to USD LIBOR, Sterling LIBOR and euro LIBOR concerning alternative reference rates and contractual fallbacks.

While considerable progress was made in 2018, it is clear that many challenges remain. In particular, work performed in 2018 by the official sector, trade associations and working groups to develop forward-looking term rates derived from RFRs has confirmed the difficulty in coming up with such rates. The Official Sector Steering Group (OSSG) of the FSB has stated that the development of such rates is, at this point, at an earlier stage and less certain than the development of RFRs. Appendix 1 of the report contains summaries of contractual fallback proposals from ISDA, the LMA and several official sector and industry working groups, as well as views of some other fallback clauses seen with respect to several financial products and markets.

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