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Understanding the ICE LIBOR Licensing Agreement for Financial Firms

The world of finance is built on trust, but sometimes that trust can be misplaced. That`s what happened with LIBOR, the London Interbank Offered Rate, which for decades was used as a benchmark for trillions of dollars of loans, derivatives, and other financial products. However, in 2012, it was revealed that LIBOR had been manipulated by some banks for their own profit, leading to fines, lawsuits, and a loss of confidence in the accuracy and integrity of the rate.

To address this issue, the UK Financial Conduct Authority (FCA) announced in 2017 that it would no longer compel banks to submit LIBOR rates after 2021, and that the benchmark would be replaced by alternative reference rates, such as SONIA (Sterling Overnight Index Average) for GBP LIBOR and SOFR (Secured Overnight Financing Rate) for USD LIBOR. This transition poses a complex challenge for financial firms that have built their systems and contracts around LIBOR, and need to adapt them to the new rates before the deadline.

One of the ways in which companies can access the new reference rates is through a licensing agreement with ICE Benchmark Administration (IBA), a subsidiary of Intercontinental Exchange (ICE), which is the administrator of LIBOR. The ICE LIBOR Licensing Agreement is a legal contract that enables firms to use, reproduce, and distribute the new reference rates, as well as the historical LIBOR data, under certain conditions and fees. The agreement covers different versions of the rates, ranging from spot rates to tenors of up to 12 months, as well as related indices and methodologies.

Some of the key terms and requirements of the ICE LIBOR Licensing Agreement are:

– Eligibility: Only entities that meet certain criteria, such as being regulated by a relevant authority or having a certain amount of assets or revenue, can apply for a license. The IBA also reserves the right to deny or revoke a license if the user breaches the agreement.

– Usage restrictions: The license allows the user to use the rates for their own internal purposes, such as risk management, valuation, or accounting, but not for commercial purposes, such as creating new financial products or offering services to third parties. The user is also required to cite the source of the rates and the disclaimer that they are not intended to be a recommendation or guidance for any purpose.

– Fee structure: The IBA charges different fees based on the type of usage and the volume of data, which can be paid annually or monthly. The fees also include an indemnity for any claims arising from the use of the rates, as well as a termination fee if the user cancels the license before its expiration.

– Compliance and reporting: The user is responsible for complying with all applicable laws and regulations related to the use of the rates, as well as for maintaining accurate and complete records of their usage and reporting them to the IBA upon request. Failure to comply with these obligations can result in penalties or termination of the license.

Overall, the ICE LIBOR Licensing Agreement offers a way for financial firms to access the new reference rates and adjust to the post-LIBOR world, but it also imposes some obligations and costs. Firms need to carefully assess their needs and capabilities before applying for a license, and to ensure that they have a plan in place to migrate their existing contracts and systems. The transition from LIBOR to the new rates is not just a technical or legal challenge, but also a strategic and cultural one, as it requires a shift in mindset from relying on a flawed benchmark to embracing a more robust and transparent one.