On April 7, 2021, the proposed New York “legislative solution” for legacy USD LIBOR contracts became Article 18-C of the New York General Obligations Law. Article 18-C is primarily aimed at USD LIBOR contracts, securities or instruments (e.g., floating rate notes (“FRNs”), loans, securitizations and mortgages) with the 2006 ISDA Definitions LIBOR fallbacks, or no fallback provisions at all, and which are governed by New York law. This article focuses on the law’s effect on USD LIBOR FRNs.
Today the German Banking Association (Bundesverband deutscher Banken – BdB) published its Supplementary Agreement for IBOR succession (Zusatzvereinbarung für IBOR-Nachfolgeregelung (IBOR-Zusatzvereinbarung)), a template agreement for the transition away from LIBOR under the German Master Agreement for Financial Derivatives Transactions (Deutscher Rahmenvertrag für Finanztermingeschäfte – DRV). The DRV is not covered by the ISDA 2020 IBOR Fallbacks Protocol. The BdB’s new template agreement does not provide for a protocol solution; rather, it provides for bilateral agreements that broadly reflect the provisions of the ISDA 2020 IBOR Fallbacks Protocol. The bilateral agreement amends the underlying DRV documentation and is governed by German law. It covers all five of the key LIBOR currencies: USD, GBP, EUR, CHF and JPY. The agreement is intended to be a suitable fallback within the meaning of the EU Benchmark Regulation. By way of further annexes and optional elections, it allows the parties to make several choices to customise the template agreement. At this time the template agreement is only available in the German language.
This new template agreement complements the previously published EONIA to €STR template agreement, which we discussed in our earlier blog post, Documenting Benchmark Transition Under the German Master Agreement for Financial Derivatives Transactions.
What does the 5 March 2021 announcement by the UK Financial Conduct Authority on the future cessation or loss of representativeness of all 35 LIBOR benchmarks mean for the over 13,500 adherents to the ISDA 2020 IBOR Fallbacks Protocol and its fallbacks supplement? What does it mean for the counterparties using bilateral amendment agreements that incorporate the Fallbacks Protocol and Fallbacks Supplement? What does it mean for those counterparties that have entered into new derivatives arrangements, from 25 January 2021, incorporating the 2006 ISDA Definitions, which, since that date, now include the Fallbacks Supplement as its ‘freshly minted’ Supplement 70?
These questions and more are answered in What the FCA’s announced Index Cessation Event means for the 13,500+ adherents and other users of the 2020 ISDA IBOR Fallbacks Protocol and Fallbacks Supplement, first published on our new derivatives blog, The Long and Short of It.
In a flurry of legislative activity on 24 March 2021, the New York State Senate and Assembly passed bills that, once signed by Governor Cuomo, will facilitate the transition from LIBOR of “tough legacy” contracts that are governed by New York law and that do not include adequate interest rate fallback provisions that contemplate a permanent cessation of LIBOR. Read the full Legal Update at mayerbrown.com.
UK Finance partner, Ash McDermott, provides a flavour of what is emerging in terms of benchmark alternatives as the end of LIBOR comes closer in his article, “What’s on the menu at the benchmark bistro?” for the 22 March 2021 edition of Berne Union’s The BUlletin.
On March 9, 2021, the US Board of Governors of the Federal Reserve System (“FRB”) issued SR 21-7, Assessing Supervised Institutions’ Plans to Transition Away from the Use of the LIBOR, providing guidance to its bank examiners on how to assess the progress of supervised institutions in preparing to transition away from U.S. dollar (USD) LIBOR as a reference rate. This guidance is intended to complement the Interagency Statement on LIBOR Transition that FRB issued in November 2020, which encouraged supervised firms to cease entering into new contracts that reference LIBOR as soon as practicable and noted that entering into such contracts after December 31, 2020, would create safety and soundness risks.
On 5 March 2021, ICE Benchmark Administration (“IBA”), the administrator of LIBOR, released the much anticipated feedback statement (“Cessation Statement”) reporting the results of its 4 December 2020 Consultation on Potential Cessation. IBA consulted on the issue of LIBOR publication cessation because “a majority of LIBOR panel banks had communicated to IBA that they would not be willing to continue contributing to the relevant LIBOR settings after [the proposed cessation] dates.” Pursuant to the Cessation Statement, IBA intends to cease publication of (i) all GBP, EUR, CHF and JPY LIBOR settings, and the 1 Week and 2 Month USD LIBOR settings immediately following the LIBOR publication on 31 December 2021, and (ii) the Overnight and 1, 3, 6 and 12 Month USD LIBOR settings immediately following the LIBOR publication on 30 June 2023, subject to any rights of the UK Financial Conduct Authority (“FCA”), the regulatory supervisor of IBA, to compel IBA to continue publication using a changed methodology. Individual non-confidential responses to the consultation, of the 55 responses received, can be viewed on the IBA website.
In testimony on Wednesday, February 24, 2021 before the United States House of Representatives Committee on Financial Services, the Chairman of the Board of Governors of the Federal Reserve System, Jerome Powell, responded to questions regarding LIBOR transition from Representative Brad Sherman (D-CA), Chairman of the Investor Protection, Entrepreneurship and Capital Markets Subcommittee. Sherman had asked Powell: “In your view, is it necessary to have federal legislation to have a smooth transition after June 2023 when LIBOR is no longer published?”
On January 8, 2021, the staff of the US Securities and Exchange Commission’s (“SEC”) Office of Municipal Securities (“OMS Staff”) issued a statement focusing on the impact of the discontinuation of LIBOR on the municipal securities markets. The statement highlights considerations for issuers of municipal securities and other “obligated persons” and municipal advisors to address the fact that the expected discontinuation of LIBOR “could have a significant impact on the municipal securities market and may present a material risk” for market participants.
Read the full Legal Update at mayerbrown.com.
With 2021 in full swing, we have received a number of queries from our clients trying to sort out the competing recommended best practice milestones for preparing for the transition from LIBOR to alternative reference rates. To assist in this analysis, we have prepared a matrix—Summary of LIBOR Transition Recommendations for Key LIBOR Currencies—setting forth the recommendations for the major LIBOR currencies as proposed by the several global working groups and the Financial Stability Board.
Access the LIBOR Recommendations Summary matrix (PDF)