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

The Benchmark Regulation (“BMR”) came into force in 2016 and applies since 1 January 2018. It aims to regulate benchmarks, including interest rate benchmarks such as London Interbank Offered Rate (“LIBOR”), used in the EU in order to make such benchmarks more reliable. For this purpose, the Benchmark Regulation introduced licensing and registration requirements but also obligations for users of benchmarks to deal with, and provide for plans in case of, interruptions or cessations of benchmarks. The BMR, however, does not give supervising authorities the right to directly amend financial instruments or contracts if the parties to it are unable to replace a benchmark for whatever reason. So any of these plans are subject to civil law requirements and restrictions applicable to a financial instrument or contract under its governing law.

Continue Reading Proposal for a Governmental IBOR Transition in the European Union