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)
The end of 2021 is fast approaching and regulators in the UK and the US remain steadfast in their encouragement for banks to stop using LIBOR where possible before that date.
In light of this, UK Finance and PwC have published Discontinuation of LIBOR – Guide for Banks and Lenders, a resource specifically focused on the transition issues faced by banks and other lenders. It is intended as a useful toolkit to support their engagement for the move away from LIBOR and to guide them to the relevant information to support preparations. The guide is especially useful for those that are less familiar with the latest detail on LIBOR discontinuation.
On February 10, 2021, the Office of the Comptroller of the Currency (“OCC”) released a self-assessment tool to assist the institutions that it regulates in preparing for the expected cessation of the London InterBank Offered Rate (“LIBOR”).
Following the discussion and status set out in our September 2020 blog post, Proposal for a Governmental IBOR Transition in the European Union, the proposed amendment to the EU Benchmark Regulation (“BMR”) has been developed further and a consolidated version published reflecting the text agreed by the Council of the European Union and the European Parliament.
Following the implementation of the EU Benchmark Regulation (“BMR”), the Euro Interbank Offered Rate (“EURIBOR”) was modified to a hybrid methodology that relies on a three-level waterfall that prioritises the use of real transaction data when available from a group of 18 quoting European banks. As a result, EURIBOR is considered compliant under the BMR, and its administrator, the European Money Markets Institute (“EMMI”), is authorized and registered under Article 34 of the BMR. Therefore, the use of EURIBOR is expected to continue, subject to periodic reassessment in accordance with the BMR, and the financial and capital markets do not need to transition to a replacement benchmark, as is the case with many other IBORs.
Nonetheless, in January 2019 and November 2019 the Working Group on Euro Risk-Free Rates (“Euro Working Group”) published general principles and recommendations to the market with respect to the inclusion of fallback provisions in contracts that reference EURIBOR, to mitigate the risks of a temporary or permanent cessation and to make these contracts future proof. This action was in line BMR requirements that EU supervised entities provide robust written plans to address the unavailability of benchmarks including EURIBOR and implement such plans in new contracts.
Many IBOR remediation projects raise a basic question: How do you find, collect, review, and remediate the right contracts? A company might have thousands of contracts that need to be repapered, and those contracts might be scattered throughout electronic file systems and hardcopy records.
Fortunately, litigators have spent the past few decades wrestling with very similar questions, which crop up in the discovery process in any large-scale modern litigation. As the number of discoverable electronic documents exploded over time, litigators began developing sophisticated processes for finding, collecting, and reviewing them so that they could be produced to opposing counsel or used at trial. Those time-tested e-discovery techniques can be applied to IBOR remediation projects.
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.
On November 30, 2020, ICE Benchmark Administration (“IBA”), the administrator of U.S. Dollar LIBOR (“USD LIBOR”) and other IBORs, lowered the pressure with respect to the upcoming cessation of USD LIBOR. IBA announced that, following a consultation in December and January, (i) it intends to cease publication of 1-week and 2-month USD LIBOR at the end of 2021 and (ii) subject to compliance with applicable regulations, including as to representativeness, it does not intend to cease publication of the remaining USD LIBOR tenors until June 30, 2023. This IBA announcement followed an earlier IBA announcement on November 18, 2020, that all GBP, EUR, JPY, and CHF IBOR tenors would cease publication after December 31, 2021. We analyze the effect of these well-received statements on the FRN, syndicated loan and CLO markets.