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The Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (collectively, the “Agencies”) released an Interagency Statement on Reference Rates for Loans on November 6, 2020, in which they reiterated that they do not endorse SOFR—the Secured Overnight Financing Rate—or any other specific replacement rate for the London Interbank Offered Rate (“LIBOR”), for use in loan transactions.
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Continue Reading “To SOFR or Not to SOFR?”: Prudential Banking Regulators Encourage Fallback Provisions to an “Appropriate” LIBOR Replacement Rate

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In a detailed 25-page memorandum to U.S. prudential banking regulators,[1] the Alternative Reference Rates Committee detailed concerns regarding the transition from LIBOR to SOFR and possible effects on current U.S. bank regulatory capital and liquidity requirements. In the memorandum, the ARRC makes several preliminary recommendations regarding changes to such requirements, in order to facilitate such transition and avoid unintended disincentives or other adverse regulatory consequences.
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Continue Reading ARRC Requests Changes to Bank Regulatory Capital and Liquidity Requirements to Facilitate Transition from LIBOR to SOFR

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On October 28, 2020, New York State Senator Kevin Thomas introduced Senate Bill S9070, which would add a new Article 12 to New York’s Uniform Commercial Code that substantially adopts the language from the proposed legislative solution produced by the Alternative Reference Rates Committee (ARRC) in March 2020. For some market participants,[1] this announcement may trigger hearing the Halleluiah chorus from Handel’s Messiah, while others may still be asking why it took so long, and still others may be asking why bother given its potential limitations.[2]
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Continue Reading LIBOR Transition Assistance Legislation Introduced in New York State Senate

Stock Market

On 16 October, the Loan Market Association (“LMA”) published an updated version of a list that sets out the near risk-free rate (“RFR”) referencing loans which have been announced to date. The list is based on publicly available information and seeks to raise awareness of RFR-referencing loans by providing information on the conventions used.
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Continue Reading LMA publishes latest list of RFR referencing loans

The Index of Swaps on The Screen.

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.
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Continue Reading US CFTC Provides Reporting Relief for Swaps Related to Upcoming DCO Auctions Required for LIBOR Transition

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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”).
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Continue Reading New Rev Proc 2020-44 Provides Limited Relief for Amending Legacy Contracts to Add IBOR Fallbacks

City Life

On September 28, 2020, the Loan Syndication and Trading Association (“LSTA”)[1] 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.
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Continue Reading The LSTA Proposes Changes to Trading Documents for LIBOR Transition

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On October 2, 2020, the US Loan Syndication and Trading Association (“LSTA”)[1] 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.
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Continue Reading LSTA Exposes Draft Supplemental Indenture for Legacy CLOs Without Fallbacks in Order to Facilitate Transition from LIBOR

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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.
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Continue Reading A Credit-Sensitive Supplement to SOFR: Borrowers’ Objections

LIBOR to SOFR

On August 7, 2020, the Alternative Reference Rate Committee of the U.S. Federal Reserve (the “ARRC”) released a three-part “SOFR Starter Kit.” The first two parts[1] provide a history of the events that led to the replacement of the London Inter Bank Offered Rate (“LIBOR”), the choice of the Secured Overnight Financing Rate (“SOFR”) as its replacement for U.S. dollar LIBOR-based financial contracts, and how SOFR compares with LIBOR.

It is part three that brings together the numerous resources that the ARRC has published to implement its key recommendations, including links to its Best Practices (revised on September 7 to anticipate the imminent release of ISDA’s IBOR Fallback Protocol), syndicated loan conventions[2], refreshed recommended business loans fallback language[3], and an internal systems transition guide.

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Continue Reading SOFR Starter Kit Tools That Should Be Adopted Immediately