Welcome to the latest issue of Mayer Brown’s IBOR Transition Digest—a periodic compendium of global regulatory and market developments and insights on the complex issues confronting financial market participants as they plan to transition from LIBOR and its variants to replacement benchmark interest rates. As attention to IBORtransition accelerates and becomes more focused, it is critical to have access to comprehensive and timely resources about the market.
For additional resources and an introduction to our global cross-practice IBOR Transition Task Force, please visit Mayer Brown’s IBOR Transition portal.
Thought Leadership | News and Developments | Events
Almost Time for Term SOFR
Eye on IBOR Transition blog, 21 July 2021
On 21 July 2021, the U.S. Alternative Reference Rates Committee announced the publication of conventions and use cases for employing Term SOFR in transitioning loan products away from LIBOR, and held the fourth of its SOFR Symposium sessions, which focused on the “SOFR First” initiative and the need for a deep and liquid SOFR derivatives market to support Term SOFR.
Alabama Passes LIBOR Bill Substantially Identical to New York Bill
Eye on IBOR Transition blog, 19 July 2021
In April 2021, Alabama followed New York’s lead and passed the LIBOR Discontinuance and Replacement Act of 2021, a bill aimed at addressing LIBOR cessation with respect to USD LIBOR contracts governed by Alabama law that include either insufficient, or no, LIBOR fallbacks.
HKMA directs all AIs to distribute LIBOR leaflet to corporate customers by 31 July 2021
Eye on IBOR Transition blog, 9 July 2021
The Hong Kong Monetary Authority sent a letter to its authorised institutions on 8 July 2021 requesting that they send an enclosed leaflet and revised set of Q&As to their customers with LIBOR-linked contracts to promote better awareness of the implications for them of LIBOR transition.
United States – Syndicated and Bilateral Loans
Term SOFR Conventions: (Almost) Just Like LIBOR
Loan Syndications & Trading Association, 22 July 2021
Explaining the ARRC Term SOFR conventions and concluding that Term SOFR loans will be “largely documented and operationalized like LIBOR.”
ARRC Recommends Loan Conventions and Best Practices for Use of Forward-Looking SOFR Term Rate to Accelerate the Transition Away from LIBOR
Alternative Reference Rates Committee, 21 July 2021
“Market participants now have the tools and necessary guidance to support use of the SOFR Term Rate in transitioning away from LIBOR.”
Forward Looking Term SOFR and SOFR Averages (Applied in Advance) Conventions for Syndicated and Bilateral Business Loans
Alternative Reference Rates Committee, 21 July 2021
The new conventions apply to both new and legacy loans using in-advance rates, and supplement the in-arrears conventions published by the ARRC in 2020. The different reference sources, day-count conventions, and publication calendars for Term SOFR and SOFR Averages are explained, and recommendations are given regarding key loan conventions, including temporary rate unavailability, holiday and weekend conventions, lookbacks, borrowing notice and interest periods, daycounts, floors, rounding, compensation for losses, robust fallback language, and spread adjustments for transitioning legacy loans.
ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate
Alternative Reference Rates Committee, 21 July 2021
The use cases include an acknowledgement that the fallback provisions in legacy contracts that adopted the ARRC’s recommendations all will fall back to Term SOFR, as is expected to the be case for contracts covered by the New York legislative solution, which effects a transition to the rate recommended by the ARRC/Federal Reserve. In the case of new contracts, the use of Term SOFR is supported by the ARRC for business loans and securitizations that hold term rate-linked assets, but is not supported for the “vast majority” of derivatives transactions that already reference SOFR compounded in arrears, the market depth of which is “essential to the construction of the SOFR Term Rate over time.”
LSTA Applauds ARRC Decision on Business Loans and CLOs
Loan Syndications & Trading Association, 21 July 2021
“The LSTA applauds the ARRC for supporting the use of Term SOFR for business loans, their end-user hedges, and CLOs that invest in Term SOFR loans … [which] will facilitate the transition from LIBOR and will dramatically ease the operational burden of using SOFR in loans and CLOs.”
Term SOFR: Loans, CLOs in Scope!
Loan Syndications & Trading Association, 21 July 2021
Discussing the ARRC scope of use recommendations for Term SOFR, including its supported use in business loans, limited derivatives that hedge a Term SOFR cash product, and limited securitizations that hold Term SOFR-linked loans.
United States – Derivatives
ARRC Endorses MRAC Recommendations for September 21 “RFR First” Move of Interdealer Cross-Currency Swap Market Trading Convention
Alternative Reference Rates Committee, 21 July 2021
ARRC endorsed the second phase of the CFTC “SOFR First” initiative, which calls for cross-currency swap conventions to change from LIBOR to SOFR and other RFRs by 21 September 2021.
Statement from CFTC Staff on Transition Away from LIBOR
Commodity Futures Trading Commission, 14 July 2021
“Sound functioning systemically important benchmarks are vital to derivatives markets that the CFTC oversees. As the timelines for the end of all LIBOR panels are now clear, the Divisions’ staff believe that continued reliance on LIBOR benchmarks poses risks to the stability and integrity of these markets and consumer protection. … Therefore, the cessation of and transition away from LIBOR remains one of the Divisions’ significant regulatory priorities.”
SOFR First – MRAC Subcommittee Recommendation
Commodity Futures Trading Commission, 13 July 2021
The Market Risk Advisory Committee of the Commodity Futures Trading Commission has adopted SOFR First—a phased initiative for switching trading conventions from LIBOR to SOFR—as a best practice for consideration by the full Commission.
ARRC Commends the CFTC Market Risk Advisory Committee’s Formal Adoption of a Recommendation on Transitioning Interdealer Derivatives Market Trading Conventions to SOFR
Alternative Reference Rates Committee, 13 July 2021
ARRC Chair, Tom Wipf, notes that MRAC’s adoption vote “demonstrates that derivatives are moving to SOFR, which will make a formal ARRC Term SOFR recommendation possible.”
United States – General
Bloomberg Short-Term Bank Yield Index (BSBY) Report: Additional analysis and key facts
Bloomberg, 1 July 2021
Informing public-sector and industry-level discussion about how credit sensitive rates can facilitate benchmark transition. Topics include how BSBY is “fundamentally and structurally different from LIBOR” and resistant to “potential manipulation.”
United Kingdom – Syndicated and Bilateral Loans
Active transition of legacy GBP LIBOR loan contracts – Timelines and considerations for borrowers
Bank of England, 13 July 2021
Reflecting the end-Q3 milestone for new originations set by the Sterling Working Group, and presented in a Q&A format.
United Kingdom – Derivatives
The FCA and the Bank of England encourage market participants in a switch to RFRs in the LIBOR cross-currency swaps market from 21 September
Financial Conduct Authority and Bank of England, 21 July 2021
In order to support markets in building the necessary liquidity to meet recommended transition milestones, the FCA and the Bank of England support a change in the quoting conventions of LIBOR cross-currency swaps in the interdealer market on the proposed date of 21 September.
LIBOR Transition and the Derivatives Trading Obligation (CP 21/22)
Financial Conduct Authority, 14 July 2021
Proposing amendments to exclude OTC derivatives that are based on benchmark rates that are being discontinued or may continue on an unrepresentative basis. Comments are due by 25 August 2021.
Europe – General
Letter from the European RFR Working Group Chairman to the European Commission re a Statutory Replacement for EONIA
European RFR Working Group, 15 July 2021
Citing the slow pace of transition to date and the impending discontinuance of EONIA, and proposing €STR as a statutory replacement rate for EONIA “as part of a comprehensive solution for cash and derivative products.”
Executive Summary of the 1 July 2021 meeting of the National Working Group on Swiss Franc Reference Rates
Swiss National Bank, 1 July 2021
Highlights include urging acceleration of transition to SARON options (including the “Last Recent” and the SARON 1M Compound Rate as “in advance” options) before year end, switching to SARON as the single price reference and benchmark for CHF derivatives, and recommending the use of the ISDA CHF spread adjustment to SARON when necessary.
Asia and Pacific Rim – General
Updated: SORA – A Guide for Corporates and SMEs
Association of Banks in Singapore, 15 July 2021
Updated to reflect the benchmark transition event on 5 March 2021.
Letter to Authorised Institutions re Reform of interest rate benchmarks
Hong Kong Monetary Authority, 8 July 2021
Providing all AIs a leaflet, jointly prepared by HKMA and the Treasury Markets Association, regarding the importance and implication of LIBOR transition. AIs are asked to distribute the leaflet prior to 31 July to AI customers with LIBOR-linked contracts and confirm to HKMA that they have done so.
Leaflet: Transitioning away from LIBOR – Important Points to Note for Corporate Treasurers
Hong Kong Monetary Authority and Treasury Markets Authority, 8 July 2021
Reminding market participants to make “suitable preparations” for LIBOR transition if they have not done so already.
Transitioning away from LIBOR: Q&As for Corporate Treasurers
Hong Kong Monetary Authority and Treasury Markets Authority, 8 July 2021
An update to the July 2020 Q&A document, acknowledging the 5 March 2021 announcements and urging robust fallbacks, adherence to the ISDA 2020 IBOR Fallbacks Protocol, and avoidance of new LIBOR-linked contracts.
Cessation of LIBOR: Transition Arrangements
Reserve Bank of India, 8 July 2021
The Reserve Bank of India has issued Roadmap for LIBOR Transition, an advisory to its regulated institutions outlining the key steps to be taken to prepare for the transition away from LIBOR, as well as the Mumbai Interbank Forward Outright Rate (MIFOR), which uses LIBOR as an input. Instead, Financial Benchmarks India Pvt Ltd has begun to publish daily adjusted and modified MIFOR rates from June 2021 for use in both legacy and new contracts.
Global – General
Updated IBOR Fallbacks Fact Sheet
International Swaps and Derivatives Association, 13 July 2021
Reflecting the benchmark transition event that occurred on 5 March 2021.
Updated IBOR Fallback Rate Adjustments FAQs
International Swaps and Derivatives Association, 13 July 2021
Reflecting the benchmark transition event that occurred on 5 March 2021.
Replays of all of our IBOR Transition Webinar Series presentations are available via iTunes podcasts, Google play or Spotify, as well as on the IBOR Transition Webinar Series page of our dedicated IBOR Transition portal.
