On 16 October, the Working Group on Sterling Risk-Free Reference Rates (“RFRWG”) announced the publication of two documents in their ongoing work to inform and ease the path of transition from IBORs. The papers summarise the current position in relation to two resources: the beta versions of Term SONIA Reference Rates (“TSRRs”) and risk-free rate (“RFR”) calculators.
On 16 October, the Loan Market Association (“LMA”) published an updated version of a list that sets out the near risk-free rate (“RFR”) referencing loans which have been announced to date. The list is based on publicly available information and seeks to raise awareness of RFR-referencing loans by providing information on the conventions used.
Continue Reading LMA publishes latest list of RFR referencing loans
On 21 September 2020, Steven Maijoor, Chair at the European Securities and Markets Authority (“ESMA”), delivered a speech at City Week 2020 in London. He gave a summary of the most recent and upcoming steps with regard to the implementation of the Euro Short-Term Rate (“€STR”)—an unsecured, transaction-based overnight rate—as the new market standard interest rate for Euro-based borrowings.
Continue Reading ESMA Chair Steven Maijoor discusses the status of €STR, EONIA and EURIBOR
Perhaps responding to complaints about the lack of global coordination of transition for the expected cessation of LIBOR by December 31, 2021, the Financial Stability Board (“FSB”) issued a Global Transition Roadmap (“GTR”) for LIBOR on October 16.
Continue Reading Financial Stability Board Issues Global LIBOR Transition Roadmap
On October 13, 2020, the Division of Market Oversight of the Commodity Futures Trading Commission (“CFTC”) issued swap transaction and pricing data reporting relief to specific derivatives clearing organizations (“DCOs”) and market participants participating in upcoming DCO auctions that will help transition certain cleared swaps from discounting using the Effective Federal Funds Rate to the Secured Overnight Financing Rate. This discounting transition is an essential part of the industry-wide initiative to transition from swaps that reference the London Interbank Offered Rate, and other interbank offered rates, to swaps that reference alternative benchmarks.
On Friday, October 9, 2020, the US Internal Revenue Service released Revenue Procedure 2020-44 (the “Revenue Procedure”), providing retroactive but limited relief for amending specific types of legacy contracts to add fallback mechanics for LIBOR or other IBORs. The fallback language included must rather strictly follow select model contract language recommended by the Alternative Reference Rate Committee (the “ARRC”) and the International Swaps and Derivatives Association (“ISDA”).
On October 9, ISDA published a statement from its board of directors announcing that ISDA will launch the IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol on October 23, 2020, and that the supplement and the amendments made by the protocol will take effect on January 25, 2021. According to the statement, the protocol will remain open for adherence after the January 25, 2021, effective date.
Also on October 9, the U.S. Alternative Reference Rates Committee, a group of private-market participants convened by the Federal Reserve Board and Federal Reserve Bank of New York, issued a statement supporting the protocol and encouraging broad market uptake, and the Federal Reserve Board issued a Supervision and Regulation Letter recommending that supervised firms active in the derivatives market “give strong consideration to adhering to the Protocol.”
Our earlier blog post, ISDA Raises Starter Pistol on IBOR Transition Race, discussed ISDA’s press release regarding updating the fallbacks timetable.
On September 28, 2020, the Loan Syndication and Trading Association (“LSTA”)[1] exposed draft revisions to the LSTA form of Par/Near Par Loan Trade Confirmation Standard Terms and Conditions to facilitate the transition from LIBOR to SOFR (or other alternative risk-free rates (“RFRs”)) for the US syndicated loan market. Once these revisions are finalized, comparable revisions will be made to the LSTA’s distressed documentation.
Continue Reading The LSTA Proposes Changes to Trading Documents for LIBOR Transition
On October 2, 2020, the US Loan Syndication and Trading Association (“LSTA”)[1] released for comment an exposure draft of LIBOR Replacement Provisions for Amendment of CLO Indenture and announced its intention to publish a final version in November. The LSTA stated that the purpose of the operative LIBOR replacement provisions and accompanying form of supplemental indenture is to provide a template for CLO investors and transaction parties to use in connection with a CLO transaction that does not already contain provisions to effect the transition or fallback from LIBOR to a non-LIBOR benchmark rate upon the occurrence of specified LIBOR transition events.
During an economic downtown, LIBOR (and the interest rate on a LIBOR-priced loan) would likely increase. Because SOFR is a rate based on transactions secured by U.S. Treasury obligations, it’s possible that during an economic downtown SOFR (and the interest rate on a SOFR-priced loan) would not increase and would in fact decline. Thus, in times of economic stress, a bank’s income from its SOFR-priced loans would decline, while its funding costs would increase.
Continue Reading A Credit-Sensitive Supplement to SOFR: Borrowers’ Objections