As preparation for the transition from the London Interbank Offered Rate and similar interbank offered rates to replacement benchmark interest rates quickly accelerates, we explore a number of recent core global developments affecting structured finance products.
The German Master Agreement for Financial Derivatives Transactions (Rahmenvertrag für Finanztermingeschäfte – the “DRV”) is published by the German Banking Association (Bankenverband) and can be considered the German law equivalent of the ISDA Master Agreement. Like the ISDA Master Agreement, standardised Annexes are used to document specific provisions, for example special early termination provisions, as well as to document the posting of collateral, which is done via the Collateral Addendum (Besicherungsanhang – the “BSA”), including the Variation Margin and Initial Margin BSA.
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.
Continue Reading US CFTC Provides Reporting Relief for Swaps Related to Upcoming DCO Auctions Required for LIBOR Transition
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.…
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.
The People’s Bank of China (“PBOC”) released a white paper on August 31, expressing its intention to adopt the Depository-Institutions Repo Rate (“DR”) as the alternative substitute rate in the Chinese banking market. Several pricing indicators were used in Chinese banking market, including Repo Rate (“R”), DR, Fixing Repo Rate (“FR”), General Collateral Repo Rate (“GC”), Loan Prime Rate (“LPR”), China Interbank Offered Rate (“CHIBOR”) and Shanghai Interbank Offered Rate (“SHIBOR”). The white paper discusses the possibility of these indicators as alternative substitute rate and concludes that amongst these, DR has become the most important indicator amongst such rates in the PRC lending market. According to the white paper, DR is the indicator which best reflects the liquidity condition and financing interest rates in the banking system, and is already widely accepted by the market.
Continue Reading Depository-Institutions Repo Rate – China’s Response to LIBOR Transition