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.
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.
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”) 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.
On October 2, 2020, the US Loan Syndication and Trading Association (“LSTA”) 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.
Artificial intelligence (“AI”) isn’t just a buzzword for eDiscovery practitioners. It’s been a part of their standard toolset for a decade now, starting with early “predictive coding” tools. eDiscovery now supports a robust, mature selection of technology-assisted review (“TAR”) AI technologies, with Continuous Active Learning being the most widely adopted. eDiscovery Practitioners thus have direct experience with the benefits (and limitations) of AI. Much of this experience can be leveraged to help businesses in IBOR transition projects.
On September 23, 2020, Scott O’Malia, CEO of the International Swaps and Derivatives Association (“ISDA”), stated that ISDA is now on the cusp of publishing the IBOR Fallbacks Protocol (the “Protocol”) and the IBOR Fallbacks Supplement (the “Supplement”), and provided an updated timetable of the remaining steps to publication and effectiveness.
The Protocol and Supplement are being published to address the anticipated cessation of publication of LIBOR at the end of 2021, and the market transition to risk-free rates, including SONIA, SOFR, €STR, SARON and TONAR. The Protocol will enable market participants that elect to adhere to incorporate fallback language into legacy derivatives contracts with other adhering counterparties in order to transition to replacement benchmarks. The Supplement will ensure that any new derivatives contracts entered into after its effective date that incorporate the 2006 ISDA Definitions and reference a covered IBOR rate will automatically include new fallbacks without any further action by the parties.