Lawyers in Mumbai - Khaitan Legal Associates
                     The 
LIBOR
TIMrPLaICAnTIsONiSt OiFo THE 
n PROPOSED TRANSITION
Points to 
Table of discuss:Volatility
Fund transfer pricing 
 (“FTP”)  Legal contractsUncertainty of 
borrower  Cost of 
Content funds issue
s
Federal Reserve Bank’s proposed LIBOR  
replacement for U.S. dollar products, the  
secured overnight financing rate (“SOFR”) is  
based on actual secured overnight 
Volatilit transactions  in the treasury repurchase 
(repo) market.
y Therefore, ARRs such as SOFR are subject to  volatility triggered by stress and irregularities 
in  the repo funding market.
In the transitional arrangements, entities would  
need to evaluate appropriate FTP processes 
Fund to  allow them to measure cost. LIBOR has 
inherent  interbank credit premium basis 
transfer  unsecured  exposure and forward-looking term structure of  rates set daily. The 
pricing transitional arrangements  would have to inculcate baseline new pricing  and also 
(“FTP”) include within it measures of  profitability.
There is possibility of litigation on issues  
pertaining to interpretation and enforceability of 
 legacy fallback language which only provided  
for temporary unavailability of LIBOR. As a  
matter of Indian law, Section 56 of the Indian 
Legal   Contract Act, 1872, provides for discharge of  parties from their contractual obligation owing 
to  the occurrence of some supervening 
contrac event,  which renders its performance 
impossible, like  permanent unavailability of 
ts LIBOR. As a result,  banks in India could recall 
the facilities extended  under such 
arrangements declaring frustration.
There is therefore uncertainty on what 
rights  could then be exercised by 
borrowers and how  such cancellation would 
take place. Likelihood  of litigation is, 
therefore, high.
The overnight ARRs are likely to be lower than  
the LIBOR rates. To balance the value, the  
replacements would need to be appropriately  
Uncertainty adjusted. Suggestions include calculation of  
cost of borrowing at the end of the interest  
of  borrower period by compounding backwards. This will  cause significant issues as the borrower will 
not  know cost of borrowing at the time of 
taking  debt. In particular such a solution 
does not work  for the trade finance market 
where margins are  set up front.
While cost of funds is a commercial concept 
 ascertained by banks basis various 
Cost of  objective  and subjective factors, the 
absence of any  legislative framework or 
funds guidance to provide  backing to the calculation of its cost of funds  makes it 
issue susceptible to challenge. Accordingly,  if banks were to adopt an interest spread on  
their lending book basis cost of funds, 
proving  the same in a court could get very 
challenging.
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