Benchmark unavailability period: Overview, definition, and example
What is a benchmark unavailability period?
A benchmark unavailability period refers to a specified time frame during which a financial benchmark or reference rate is unavailable or cannot be used. Benchmarks are commonly used in financial contracts, such as loans, derivatives, and bonds, to set interest rates, determine payments, or measure performance. The unavailability period occurs when the benchmark cannot be determined or published due to issues such as market disruptions, technical failures, or changes in the benchmark calculation methodology. During this time, alternative reference rates or adjustments may be used to ensure that the terms of the contract or financial agreement are still met.
For example, if a widely used interest rate benchmark like LIBOR (London Interbank Offered Rate) is temporarily unavailable, the contract may specify a benchmark unavailability period during which a fallback rate is applied.
Why is the benchmark unavailability period important?
The benchmark unavailability period is important because it provides a clear framework for addressing situations where a key financial benchmark cannot be used due to unforeseen circumstances. Financial markets depend heavily on these benchmarks to set pricing and determine obligations in contracts, so having an established procedure during periods of unavailability helps avoid confusion, disputes, or delays. By including a benchmark unavailability period in contracts, parties can ensure that their agreements remain valid and enforceable, even if the original benchmark is temporarily inaccessible. It provides legal certainty and continuity in financial transactions.
Understanding benchmark unavailability period through an example
Let’s say a company has entered into a floating-rate loan agreement where the interest rate is based on LIBOR. If LIBOR is temporarily unavailable due to a market disruption or technical failure, the loan agreement may contain a clause specifying a benchmark unavailability period. During this time, the interest rate would be calculated using an alternative reference rate, such as the Federal Reserve's SOFR (Secured Overnight Financing Rate), to ensure that the loan remains functional and payments continue as planned.
In another example, a derivative contract may rely on a specific index or rate as a benchmark. If that benchmark becomes unavailable due to changes in market conditions or regulatory decisions, the contract may provide for a benchmark unavailability period in which the parties use a pre-agreed substitute, allowing the derivative to continue without disruption.
An example of a benchmark unavailability period clause
Here’s how a benchmark unavailability period clause might appear in a financial contract:
“In the event that the Benchmark is unavailable for a period of [insert number] days, the Parties agree that the interest rate shall be determined using an alternative reference rate, as specified in the fallback provisions of this Agreement, for the duration of the Benchmark unavailability period.”
Conclusion
The benchmark unavailability period is a vital mechanism in financial contracts to ensure that the terms of the agreement continue to be enforceable when a key benchmark is temporarily unavailable. By clearly defining the process for handling unavailability, parties can mitigate risks, prevent disputes, and maintain the stability of financial agreements. This provision is essential for maintaining flexibility and ensuring that financial transactions proceed smoothly, even in the face of unforeseen disruptions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.