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Since publication of our Eye on IBOR Transition article in the Winter 2020 issue of the Mayer Brown Structured Finance Bulletin, IBOR transition activity has accelerated significantly, in large part due to (a) the effectiveness on 25 January 2021 of the ISDA 2020 IBOR Fallbacks Protocol and the related Supplement No. 70 to the 2006 ISDA Definitions; (b) the announcements on 5 March 2021 by ICE Benchmark Administration, LIBOR’s administrator (“IBA”), and the UK Financial Conduct Authority, IBA’s regulator, that IBA will cease publication of the majority of LIBOR settings after publication on 31 December 2021, and of all remaining settings after publication on 30 June 2023; (c) the change in trading conventions for interdealer linear swaps from LIBOR to the Secured Overnight Financing Rate (“SOFR”) on 26 July 2021 pursuant to the Commodity Futures Trading Commission’s “SOFR First” Transition Initiative, and (d) the formal recommendation on 29 July 2021 by the Alternative Reference Rates Committee of a SOFR term rate.

We discuss these key events in detail in our article in the Winter 2021 issue of the Journal of Investment Compliance.

Read the full article (PDF).

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On 29 September 2021 the UK Financial Conduct Authority (“FCA”) published Consultation Paper CP21-29: Proposed decisions on the use of LIBOR (Articles 23C and 21A BMR), in which it set out its plans for the temporary publication of ‘synthetic’ versions of LIBOR for a narrow range of outstanding sterling and yen contracts that cannot be switched in time for LIBOR cessation at the end of 2021.  LIBOR rates are currently published by ICE Benchmark Administration (“IBA”) and the FCA announced that it is using its powers to compel IBA to continue publishing 1-, 3-, and 6-month GBP and JPY LIBOR rates in synthetic form from 1 January 2022 and for the duration of 2022. The synthetic methodology will be based on applicable term risk-free rates and is proposed to apply to financial contracts other than cleared derivatives.

CP21-29 follows the FCA’s 20 May 2021 Consultation Paper CP21-15 on the policies that it would follow in exercising its new powers under the UK Benchmarks Regulation ((EU) 2016/1011), as amended by the Financial Services Act 2021. With respect to which Feedback Statement FS21-10: FCA use of powers over the use of critical benchmarks also was published on 29 September 2021.

In addition to proposing synthetic GBP and JPY LIBOR rates for short-term use beginning 1 January 2022, CP 21-29 also proposes to prohibit continuing use after 31 December 2021 of overnight and 1-, 3-, 6-, and 12-month USD LIBOR except pursuant to five exceptions specified in section 1.17 of the consultation.

Consultation Paper CP21-29 closes for comments on 20 October 2021. The FCA will decide and specify before year-end which legacy contracts are permitted to use these synthetic LIBOR rates for at least a year. The FCA encouraged users of GBP and JPY LIBOR settings to take steps to ensure that they understand “how their contract terms interact with [FCA’s] proposed decision.”

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 The UK Government passed the Financial Services Act 2021 (the “FS Act 2021”) on 29 April 2021, which amended the UK Benchmarks Regulation ((EU) 2016/1011) (the “UK BMR”), to provide the UK Financial Conduct Authority (the “FCA“) with new and enhanced powers to oversee the orderly wind-down of critical benchmarks. In particular, the legislation addresses the risk that LIBOR cessation poses to “tough legacy contracts” (i.e., contracts that genuinely have no or inadequate fallback rate alternatives and no realistic ability to be renegotiated or amended). The Critical Benchmarks (References and Administrators’ Liability) Bill (the “Bill”) has been drafted to address these risks.

Continue Reading The Critical Benchmarks (References and Administrators’ Liability) Bill receives its first reading in the House of Lords

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On 19 August 2021, the Hong Kong Monetary Authority (“HKMA”) issued Circular B1/15C to all authorised institutions (“AIs”) with the following updates on recent developments on the reform of interest rate benchmarks.

Continue Reading HKMA Circular on Term SOFR, new USD LIBOR-linked contracts after 2021, and stepping up surveillance of AI readiness

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The version of the proposed federal Adjustable Interest Rate (LIBOR) Act of 2021 that was introduced in the House of Representative in 2020 mirrored, with a handful of notable exceptions, both the substance and the text of the analogous New York State legislation that became law on 6 April 2021 (the New York statute is included as a new article 18-C of the General Obligations Law).  However, the text of the proposed federal statute that the House Committee on Financial Services ordered reported to full House on 28 July of this year differs markedly from the New York statute.

Continue Reading A Closer Look at the Adjustable Interest Rate (LIBOR) Act of 2021

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Despite recent regulatory “encouragement” to adopt SOFR as “preferred” by the Alternative Reference Rates Committee (ARRC), we continue to observe credit agreements in the US loan markets that use a credit-sensitive alternative rate (CSR) to SOFR.

In fact, a recent check of public filings showed eight reported credit agreements that used a CSR, specifically the Bloomberg Short-Term Bank Yield Index (BSBY).

Read the full article (PDF).

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On 29 July 2021, the Alternative Reference Rates Committee formally recommended the forward-looking SOFR term rates published by CME Group. As reported in our earlier blog post, Almost Time for Term SOFR, the rate is recommended for use in business loans, as well as the related hedges and securitizations (notably for CLOs).

Continue Reading It’s Here! The ARRC Formally Recommends CME Group’s SOFR Term Rate

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On 21 July 2021, the U.S. Alternative Reference Rates Committee (“ARRC”) announced the publication of conventions and use cases for employing Term SOFR, as produced by CME Group, in transitioning loan products away from LIBOR. Although the ARRC has not yet recommended the use of Term SOFR, it published these new resources in anticipation of announcing shortly a formal recommendation for the use of Term SOFR “across financial markets.”

While generally helpful to support a smooth transition, the ARRC noted that Term SOFR will be especially helpful in the business loans market, particularly multi-lender facilities, middle market loans, and trade finance facilities, as well as in limited cases of hedges and securitizations tied to term rates.

Continue Reading Almost Time for Term SOFR

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In April 2021, Alabama followed New York’s lead and passed the LIBOR Discontinuance and Replacement Act of 2021, a bill aimed at addressing LIBOR cessation with respect to USD LIBOR contracts governed by Alabama law that include either insufficient, or no, LIBOR fallbacks.

Continue Reading Alabama Passes LIBOR Bill Substantively Identical to New York Bill

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On 8 July 2021, Hong Kong Monetary Authority (HKMA) issued a circular to all authorised institutions (AIs) requesting them to give a further push to promote the corporate sector’s awareness of LIBOR transition.

HKMA requested each AI to (i) distribute a leaflet (enclosed with the circular) by 31 July 2021 to all of its corporate customers that have outstanding LIBOR-linked contracts with the AI; and (ii) send an email confirmation to HKMA after completing that exercise.

Continue Reading HKMA directs all AIs to distribute LIBOR leaflet to corporate customers by 31 July 2021