Further to our post yesterday, on 8 December 2021, after a brief debate, the Adjustable Interest Rate (LIBOR) Act of 2021 was passed by the U.S. House of Representatives by a 415-9 vote. The bill, which was introduced in the House on 22 July 2021, now moves to the Senate for consideration. The bill’s sponsor, Rep. Brad Sherman, praised the strong bipartisan work to “solve a crisis before it hits. The U.S. Senate is expected to take up the bill soon, where it is expected to enjoy bipartisan support. The U.S. Alternative Reference Rates Committee applauded the passage as “vital to the success of the transition away from LIBOR.”
CFPB Issues Final Rule Addressing LIBOR Transition
On 7 December 2021, the Consumer Financial Protection Bureau (“CFPB”) issued a Final Rule to facilitate LIBOR transition, via amendments to Regulation Z. The amendments take effect on 1 April 2022, and compliance becomes mandatory on 1 October 2022.
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FCA confirms rules for legacy use of synthetic LIBOR rates and no new use of US dollar LIBOR
The interest rate benchmark LIBOR is being wound down and the UK Financial Conduct Authority has announced how it will use its powers under the UK Benchmarks Regulation to aid the orderly wind-down of sterling- and yen-linked “tough legacy contracts.”
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Refinitiv Spread-Adjusted Fallback Rates Become Production Benchmarks
With fewer than 30 days until the cessation of LIBOR, another piece of the puzzle has fallen into place for U.S. dollar LIBOR transition. On 30 November 2021, Refinitiv, the ARRC-preferred publisher of spread-adjusted SOFR-based fallback rates, announced that its USD IBOR Institutional Cash Fallbacks (“Institutional Fallbacks”), launched on 11 August 2021 as prototype rates, are now available for use as production benchmarks.
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Financial Regulators Clarify Key LIBOR Transition Considerations But Some Questions Remain
On 20 October 2021, in a Joint Statement on Managing the LIBOR Transition, the Board of Governors of the Federal Reserve System, Consumer Financial Protection Bureau (“CFPB”), Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and State Bank and Credit Union Regulators (the “Regulators”) emphasized their expectations that supervised institutions will transition away from LIBOR in an orderly fashion by the end of 2021. Transition preparedness will be an increasing area of supervisory focus and review.
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“Racing” to the IBOR Transition Finish Line
Since publication of our Eye on IBOR Transition article in the Winter 2020 issue of the Mayer Brown Structured Finance Bulletin, IBOR transition activity has accelerated significantly, in large part due to (a) the effectiveness on 25 January 2021 of the ISDA 2020 IBOR Fallbacks Protocol and the related Supplement No. 70 to the 2006 ISDA Definitions; (b) the announcements on 5 March 2021 by ICE Benchmark Administration, LIBOR’s administrator (“IBA”), and the UK Financial Conduct Authority, IBA’s regulator, that IBA will cease publication of the majority of LIBOR settings after publication on 31 December 2021, and of all remaining settings after publication on 30 June 2023; (c) the change in trading conventions for interdealer linear swaps from LIBOR to the Secured Overnight Financing Rate (“SOFR”) on 26 July 2021 pursuant to the Commodity Futures Trading Commission’s “SOFR First” Transition Initiative, and (d) the formal recommendation on 29 July 2021 by the Alternative Reference Rates Committee of a SOFR term rate.
We discuss these key events in detail in our article in the Winter 2021 issue of the Journal of Investment Compliance.
Read the full article (PDF).
FCA Proposes to Require Publication of Synthetic GBP and JPY LIBOR for Specified Tenors
On 29 September 2021 the UK Financial Conduct Authority (“FCA”) published Consultation Paper CP21-29: Proposed decisions on the use of LIBOR (Articles 23C and 21A BMR), in which it set out its plans for the temporary publication of ‘synthetic’ versions of LIBOR for a narrow range of outstanding sterling and yen contracts that cannot be switched in time for LIBOR cessation at the end of 2021. LIBOR rates are currently published by ICE Benchmark Administration (“IBA”) and the FCA announced that it is using its powers to compel IBA to continue publishing 1-, 3-, and 6-month GBP and JPY LIBOR rates in synthetic form from 1 January 2022 and for the duration of 2022. The synthetic methodology will be based on applicable term risk-free rates and is proposed to apply to financial contracts other than cleared derivatives.
CP21-29 follows the FCA’s 20 May 2021 Consultation Paper CP21-15 on the policies that it would follow in exercising its new powers under the UK Benchmarks Regulation ((EU) 2016/1011), as amended by the Financial Services Act 2021. With respect to which Feedback Statement FS21-10: FCA use of powers over the use of critical benchmarks also was published on 29 September 2021.
In addition to proposing synthetic GBP and JPY LIBOR rates for short-term use beginning 1 January 2022, CP 21-29 also proposes to prohibit continuing use after 31 December 2021 of overnight and 1-, 3-, 6-, and 12-month USD LIBOR except pursuant to five exceptions specified in section 1.17 of the consultation.
Consultation Paper CP21-29 closes for comments on 20 October 2021. The FCA will decide and specify before year-end which legacy contracts are permitted to use these synthetic LIBOR rates for at least a year. The FCA encouraged users of GBP and JPY LIBOR settings to take steps to ensure that they understand “how their contract terms interact with [FCA’s] proposed decision.”
The Critical Benchmarks (References and Administrators’ Liability) Bill receives its first reading in the House of Lords
The UK Government passed the Financial Services Act 2021 (the “FS Act 2021”) on 29 April 2021, which amended the UK Benchmarks Regulation ((EU) 2016/1011) (the “UK BMR”), to provide the UK Financial Conduct Authority (the “FCA“) with new and enhanced powers to oversee the orderly wind-down of critical benchmarks. In particular, the legislation addresses the risk that LIBOR cessation poses to “tough legacy contracts” (i.e., contracts that genuinely have no or inadequate fallback rate alternatives and no realistic ability to be renegotiated or amended). The Critical Benchmarks (References and Administrators’ Liability) Bill (the “Bill”) has been drafted to address these risks.
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HKMA Circular on Term SOFR, new USD LIBOR-linked contracts after 2021, and stepping up surveillance of AI readiness
On 19 August 2021, the Hong Kong Monetary Authority (“HKMA”) issued Circular B1/15C to all authorised institutions (“AIs”) with the following updates on recent developments on the reform of interest rate benchmarks.
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A Closer Look at the Adjustable Interest Rate (LIBOR) Act of 2021
The version of the proposed federal Adjustable Interest Rate (LIBOR) Act of 2021 that was introduced in the House of Representative in 2020 mirrored, with a handful of notable exceptions, both the substance and the text of the analogous New York State legislation that became law on 6 April 2021 (the New York statute is included as a new article 18-C of the General Obligations Law). However, the text of the proposed federal statute that the House Committee on Financial Services ordered reported to full House on 28 July of this year differs markedly from the New York statute.
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