IBOR Transition Digest

Welcome to Mayer Brown’s IBOR Transition Digest—a 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 IBOR  transition accelerates and becomes more focused, it is critical to have access to comprehensive and timely resources about the market. In this first Digest, we present a selection of updates from the months of July and August. Going forward, we will publish the Digest periodically, depending on the level of market activity.

For additional resources and an introduction to our global cross-practice IBOR Transition Task Force, please visit Mayer Brown’s IBOR Transition portal.

LEGAL UPDATES

• FINRA LIBOR Phase-Out Preparedness Survey
  Legal Update, 6 August 2020
  Update on the Financial Industry Regulatory Authority’s (“FINRA”) survey regarding common practices implemented by broker-dealer firms to prepare for the transition away from LIBOR and its 5 August Regulatory Notice 20-26, which lists important considerations when phasing out LIBOR and summarizes the results of the survey.

• “Comparable” Alternative Reference Rates to LIBOR: The Low Bar for Official Designation, the Much Higher Hurdle of “Fit for Use” and Implementation for Market Participants
  Legal Update, 4 August 2020
  Article considering the “fit-for-use determination” of chosen replacement reference rates across products and markets.

• IBOR Transition: It’s Later Than You Think!
  Legal Update, 3 August 2020
  Mayer Brown’s Paul Forrester and Mary Jo Miller share their takeaways from the 3 August 2020 US Alternative Reference Rates Committee’s penultimate session in its SOFR Summer Series: Approaching the Transition. The session focused on the shift from tweaking fallback language to concentrating on the practicalities of implementing benchmark transition, and that clearly was the focus of the 3 August webcast.

• Electronic Discovery & Information Governance - Tip of the Month: LIBOR: A New Frontier for Digital Contract Management
  Legal Update, 31 July 2020
  Mayer Brown’s Paul Forrester, Ethan Hastert and Anthony Pastore discuss the challenges to, and approaches for, identifying and collecting all potentially impacted contracts located in multiple systems and in multiple formats.

• Going Through Changes: Transitioning to a LIBOR-less World for Consumer Loans (Part II)
  Legal Update, 20 July 2020
  In our January 27, 2020, Legal Update (“Part I”), we discussed the legal and regulatory issues faced by US consumer lenders and servicers as they prepare for the eventual transition away from LIBOR. In Part I, we noted that the question of how holders and servicers of adjustable-rate loans that use LIBOR as an index should proceed was largely unanswered at the time. Since then, Fannie Mae, Freddie Mac and the Consumer Financial Protection Bureau have all issued guidance to help ease the transition for originators, holders and servicers as they navigate the quickly approaching post-LIBOR world. In this Legal Update, we summarize this guidance.

• Sunak's Solution to LIBOR Transition in “Tough Legacy” Contracts
  Legal Update, 15 July 2020
  On 23 June 2020, Rishi Sunak, chancellor of the Exchequer, set out the UK government's intention to introduce legislation to provide a solution for “tough legacy contracts” that “genuinely have no or inappropriate alternatives” to LIBOR and “no realistic ability to be renegotiated or amended.” This update offers our views and a summary of the statement in which the government recognizes that the LIBOR transition timetable has been slowed by the COVID-19 pandemic and that legislative assistance to mitigate the unintended and potentially damaging results of the LIBOR transition for counterparties of “tough legacy” contracts is required.

• OCC Expands FFIEC Statement, Provides Guidance to Banks on Managing LIBOR Transition
  Legal Update, 6 July 2020
  In OCC Bulletin 2020-68, dated 1 July 2020, the Office of the Comptroller of the Currency (OCC) expands on the contemporaneous United States Federal Financial Institutions Examination Council (FFIEC) Statement on Managing the LIBOR Transition by providing additional guidance on identifying applicable risks related to, planning for and successfully transitioning to replacement rates. While the Bulletin states that the OCC does not endorse a specific LIBOR replacement rate, it comments on Risk Management, Fallback Language, Choice of Replacement Rate, Assessing and Controlling Risk to Earnings Related to LIBOR Transition and Implications for Asset Liability Management or Hedged Products.

• US FFIEC Issues Joint Statement on Managing the LIBOR Transition
  Legal Update, 2 July 2020
  On 1 July 2020, the United States Federal Financial Institutions Examination Council (FFIEC) issued its Joint Statement on Managing the LIBOR Transition (FFIEC Statement), adding its voice to the global regulatory chorus calling for active engagement by supervised financial institutions and effective preparation for, and management of, the expected discontinuation of LIBOR and transition to alternative reference rates and warning of increased regulatory scrutiny regarding LIBOR transition preparedness. The FFIEC Statement highlights the financial, legal, operational and consumer protection risks that will result from the transition from LIBOR and encourages supervised institutions to continue their efforts to prepare for this change and address its associated risks.

EVENTS

• Key Points for the Loans Market and Linked Derivatives Hedging Arrangements
  IBOR Transition Teleconference, 3 August 2020 (49-minute recording) 
  Mayer Brown’s Ed Parker, Trevor Borthwick, David Duffee, Ashley McDermott and Emma Khoo highlight transition issues for loans and derivatives.

• The SEC OCIE Examination: A Practical Guide to Achieving "LIBOR Transition Preparedness"
  Webinar, 27 July 2020 (32-minute recording)
  Join Mayer Brown’s Marlon Paz and Leslie Cruz and Morae’s Heidi Rudolph as they discuss the Office of Compliance, Inspections and Examinations (“OCIE”) of the US Securities and Exchange Commission’s 18 June 2020, announcement that it will conduct examinations of SEC-registered investment advisers, broker-dealers and investment companies, among others, to assess their preparedness for LIBOR’s expected discontinuation.

• Are You Prepared for the LIBOR Sunset?
  Webinar, 22 July 2020 (20-minute recording)
  Mayer Brown partner Paul Forrester and Joy Saphla, president, Strategic Solutions from Morae, host the first webinar in a series that will provide information on the key issues and considerations for financial market participants regarding the LIBOR transition.

NEWS and DEVELOPMENTS

GLOBAL

• ISDA Board Statement on Adherence to the IBOR Fallback Protocol
  International Swaps and Derivatives Association, Inc. (ISDA), 29 July 2020
  ISDA will soon publish the IBOR Fallback Protocol to facilitate inclusion of the new fallbacks in existing non-cleared IBOR derivatives transactions between counterparties that both adhere to the protocol. The ISDA Board of Directors strongly supports broad adherence to the IBOR Fallback Protocol among all market participants globally that have non-cleared derivatives exposure to LIBOR and other IBORs.

• Letter to RFR Working Groups re ISDA Fallback Protocol
  International Swaps and Derivatives Association, Inc., 22 July 2020
  Updating global working groups about the launch the IBOR Fallback Protocol and the IBOR Fallback Supplement, which will implement the new fallbacks for legacy and new derivative contracts, respectively.

• Bloomberg Begins Publishing Calculations Related to IBOR Fallbacks
  International Swaps and Derivatives Association, Inc., 21 July 2020
  Bloomberg and ISDA have announced that Bloomberg Index Services Limited (BISL) has begun calculating and publishing fallbacks that ISDA intends to implement for certain key interbank offered rates as part of its soon-to-be-released Protocol.

• Interest Rate Benchmarks Review: First Half of 2020 and Second Quarter of 2020
  International Swaps and Derivatives Association, Inc., 21 July 2020
  Analyzing the traded notional volumes of interest rate derivative transactions in the United States that reference the Secured Overnight Financing Rate and other selected alternative RFRs, including the Sterling Overnight Index Average (SONIA), the Swiss Average Rate Overnight (SARON), the Tokyo Overnight Average Rate (TONAR) and the Euro Short-Term Rate (€STR) as well as transactions referencing LIBOR denominated in US dollars, sterling, Swiss franc, yen, euro, EURIBOR and TIBOR.

• Benchmark Reform at a Glance
  International Swaps and Derivatives Association, Inc., 16 July 2020
  Outlining the steps organizations can take to reduce their exposure to IBORs and handle any IBOR exposure that remains at the time of cessation.

• Supervisory Issues Associated With Benchmark Transition – Report to the G20
  Financial Stability Board, 9 July 2020
  Discussing the remaining challenges to transition based on surveys undertaken by the Financial Stability Board, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors and setting out recommendations for Identifying transition risks and challenges, facilitating transition and promoting industry-wide coordination.

• FSB Statement on the Impact of COVID-19 on Global Benchmark Reform
  Financial Stability Board, 1 July 2020
  The FSB stated that although some aspects of market participants’ transitions may be temporarily disrupted or delayed, IBOR transition remains “an essential task” and participants should continue to reduce reliance on IBORs where appropriate.

UNITED STATES

• Letter to Membership re Adherence to ISDA Protocol
  Alternative Reference Rates Committee (ARRC), 10 August 2020
  A Letter referencing ISDA’s recent statements (linked below) and urging ARRC members to sign onto the ISDA IBOR Fallback Protocol and IBOR Fallback Supplement as soon as they are published in order to “preserve the derivatives market functioning and allow LIBOR derivatives contracts to continue to perform through the transition.”

• SOFR Starter Kit – Parts 1 (History and Background), 2 (Key Facts About SOFR), and 3 (SOFR Next Steps)
  Alternative Reference Rate Committee (ARRC), 7 August 2020
  ARRC has released a set of factsheets to inform the public about the transition away from US dollar LIBOR to the Secured Overnight Financing Rate (the ARRC’s recommended alternative reference rate) and ensure market readiness for the transition prior to the 2021 year-end deadline.

• FINRA Shares Practices Firms Implemented to Prepare for the LIBOR Phase-out: Regulatory Notice 20-26
  Financial Industry Regulatory Authority (FINRA), 5 August 2020
  Summarizing the results of a survey of a representative cross-section of member firms, including some with significant trading volume in LIBOR-linked securities, about their preparedness for the phase-out of LIBOR.

• SOFR “In Arrears” Conventions for Syndicated Business Loans
  Alternative Reference Rate Committee, 22 July 2020
  Comparing daily simple SOFR and compounded SOFR and providing examples of the application of these rates in the context of possible lookback, payment delay, observation shift, rounding and floor conventions.

• Transition from LIBOR: Credit Sensitivity Group Workshops
  Federal Reserve Bank of New York (FRBNY), Workshop 1, 4 June 2020; Workshop 2, 22 July 2020
  A link to the program and workshop agendas, minutes and presentations of the Credit Sensitivity Group, hosted by the New York Fed. The group was established to build a shared understanding of the challenges that banks of all sizes and their borrowers may have in transitioning loan products from LIBOR and to explore methodologies to develop a robust lending framework that considers a credit sensitive rate/spread that could be added to SOFR.

• ARRC Letter to CFTC Requesting Modification of IBOR Transition No-Action Relief in response to ARRC Issues List
  The Alternative Reference Rates Committee, 20 July 2020
  Requesting modified no-action relief from the CFTC to address a number of new issues relating to a smooth IBOR transition, which are identified in the accompanying issues list.

• 537 Days: Time Is Still Ticking
  Speech by John Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, 13 July 2020
  “It doesn't matter whether you're a large global bank or a local company with a handful of employees, you need to be prepared to manage your institution's transition away from LIBOR.”

• ARRC’s SOFR Summer Series Event Page
  Alternative Reference Rates Committee, 10 July 2020
  ARRC hosted a webinar series during the period from 13 July through 7 August during which it educated market participants on the history of LIBOR; the development and strengths of SOFR; progress made in the transition away from LIBOR to date; and how to ensure organizations are ready for the end of LIBOR. Replays of the webcasts and access to the related slides can be found on the event page.

• Internal Systems and Processes: Transition Aid for SOFR Adoption
  Alternative Reference Rates Committee, 8 July 2020
  An informational document for market participants that classifies transition activities into categories and sub-categories, with each sub-category listing transition steps and activities for market participants to consider and identifying dependencies that may influence the timing and sequence of transition activities.

• Statement of Compliance of SOFR and other US Reference Rates with the IOSCO Principles for Financial Benchmarks
  Federal Reserve Bank of New York, 6 July 2020
  FRB has independently reviewed the internal control structure used to administer a number of benchmark rates, including SOFR, the SOFR Index and 30-, 90- and 180-day SOFR Averages, and has determined that they are in compliance with the Principles for Financial Benchmarks published by the International Organization of Securities Commissions.

• Joint Statement on Managing the LIBOR Transition
  Federal Financial Institutions Examination Council (FFIEC) and
  OCC Bulletin 2020-68 – LIBOR Transition: FFIEC Statement on Managing the LIBOR Transition and Guidance for Banks
  Office of the Comptroller of the Currency (OCC), 1 July 2020
  Companion releases providing banks with guidance for identifying risks, planning and successfully transitioning from IBORs to replacement rates.

UK/EUROPE

• Statement from the Working Group on Sterling Risk-Free Reference Rates on LIBOR Transition, UK Working Group 2020-21 Top Level Priorities and Q&A on Revised End-Q3 Milestones for Loan Markets
  Bank of England (BOE), 28 July 2020
  These three releases represent a suite of tools published by the Sterling Working Group to assist firms in taking action and implementing LIBOR transition plans.

• Proposal to Amend EU Benchmark Regulation as Regards the Exemption of Certain Third Country Foreign Exchange Benchmarks and the Designation of Replacement Benchmarks for Certain Benchmarks in Cessation
  European Commission, 24 July 2020
  The proposed BMR amendments will (a) empower the European Commission to designate a replacement rate if and when a benchmark whose cessation would result in significant disruption in the functioning of financial markets in the European Union ceases to be published; (b) by operation of the law, replace all references to the “benchmark in cessation” in all contracts entered into by an EU supervised entity; and (c) for contracts not involving an EU supervised entity, encourage Member States to adopt national statutory replacement rates. The Commission has published related Questions and Answers.

• Public Consultation on the Publication by the ECB of Compounded Term Rates Using the €STR
  European Central Bank (ECB), 24 July 2020
  This consultation seeks feedback from market participants and benchmark rate users about a number of parameters that would be applied when publishing compounded values of the Euro Short-Term Rate (€STR) for selected maturities and seeks to (a) encourage wider usage of risk-free rates by providing a source of these rate quotes and (b) provide a rate that can be used in contractual fallback provisions by users of EUR LIBOR and EURIBOR. Comments are due by 11 September 2020.

• TXF TV: The LIBOR Transition
  TFX News, 23 July 2020
  Ashley McDermott of Mayer Brown joins Dominik Kloiber of TXF TV and Aida Topcagic of JPMorgan to discuss the upcoming challenges of LIBOR transition and key related workstreams.

• Report on Preparations for Benchmark Rate Reforms
  European Central Bank, 23 July 2020
  Setting out good practices for the governance structure, risk identification approaches, action plans and documentation in relation to the benchmark rate transition for banks supervised under the Single Supervisory Mechanism.

• LIBOR Transition – The Critical Tasks Ahead of Us in the Second Half of 2020
  Speech by Edward Schooling-Latter, FCA Director of Markets and Wholesale Policy, 14 July 2020
  “The four to six months ahead of us are arguably the most critical period in the transition away from LIBOR. The time to act is now.”

• LIBOR: Entering the Endgame
  Speech by Andrew Bailey, Governor of the Bank of England, 13 July 2020
  In his fourth annual speech, Andrew Bailey once again outlines the reasons for the transition away from LIBOR and discusses progress to date with respect to Sterling LIBOR and the need to address legacy contracts (including the new powers granted to the UK FCA).

• PRA Statement on LIBOR Transition and PRA Resolution-Related Rules
  Bank of England, 7 July 2020
  The UK Prudential Regulatory Authority considers that, where the sole purpose of an amendment to a liability (as defined in Contractual Recognition of Bail-In) or a financial arrangement (as defined in the Stay in Resolution) is to transition away from LIBOR, the amendment should not be considered a material amendment, as the term applies to relevant parts of the PRA Rulebook.

• Survey Replies on €STR-Based Forward-Looking Rates Production
  European Central Bank, 2 July 2020
  Comparing the responses regarding four potential candidates, and their rate production methodologies, for the production of forward-looking rates: IHS Markit, EMMI-ICE IBA, Refinitiv, FTSE Russell.

• IBOR to RFR Transition: Effects on Financial Reporting
  Swiss National Bank, 2 July 2020
  Summarizing the effect of IBOR transition on financial reporting, primarily in relation to “hedge accounting” (IAS 39 and IFRS 9).

ASIA/PACIFIC RIM

• Second Public Consultation on the Appropriate Choice and Usage of Japanese Yen Interest Rate Benchmarks
  Bank of Japan, 7 August 2020
  Presenting the results of the deliberations of the Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks since publishing the results of the July 2019 public consultation on the basic approach toward the appropriate choice and usage of Japanese yen (JPY) interest rate benchmarks and soliciting comments on specific matters to be dealt with when fallbacks are triggered in cash products referencing JPY LIBOR from a wide range of market participants.

• SIBOR Reform and the Future Landscape for SGD Interest Rate Benchmarks
  Steering Committee for SOR Transition to SORA (SC-STS), 29 July 2020
  This consultation report, released by the Association of Banks in Singapore, the Singapore Foreign Exchange Market Committee and the Steering Committee for SOR Transition to SORA, outlines a three-stage approach to the phase-out of the Singapore InterBank Offered Rate. Comments are due by 30 September 2020.

• BBSW Methodology Enhancements Consultation
  Australian Securities Exchange Benchmark Administration (ASX), 27 July 2020
  This consultation presents proposed enhancements to the existing Bank Bill Swap Rate waterfall calculation methodology with the objective of increasing the frequency with which high-quality BBSW rates are calculated using transaction data. Comments are due by 27 August 2020

• Letter to Authorized Institutions Providing Guidance re Application of Basel Framework FAQs
  Hong Kong Monetary Authority (HKMA), 23 July 2020
  The HKMA advised institutions under its supervision how to apply the June guidance from the Basel Committee on Banking Supervision about prudential issues relating to benchmark rate reform.

• Transitioning Away from LIBOR: Points to Note for Corporate Treasurers
  Hong Kong Treasury Markets Association (TMA), 13 July 2020
  Answering questions about the transition away from LIBOR and providing recommendations to corporate treasurers about the actions they should take to assess risk and prepare for transition.

• IBOR Transition Guide for Asia
  Joint publication by ASIFMA/APLMA/ICMA/ISDA, 10 July 2020
  Providing an overview of the key implementation issues to be considered by financial institutions in Asia preparing for the transition from LIBOR in all its tenors and currencies to alternative reference rates by the end of 2021, including a Practical Implementation Checklist.

• Letter to Authorized Institutions re latest Interest Rate Benchmark Reform Survey Results and Key Milestones to Be Achieved, with 2Q2020 Survey Results and Latest Developments in Relation to Benchmark Reform
  Hong Kong Monetary Authority, 10 July 2020
  On 10 July, the Hong Kong Monetary Authority issued a letter the CEOs of all authorized institutions (AIs) setting out its transition milestones, developed with the Treasury Markets Association, which include recommendations that all AIs (i) be in a position to offer products referencing alternative reference rates from 1 January 2021; (ii) include adequate fallback provisions in all newly issued LIBOR-linked contracts that will mature after 2021; and (iii) cease to issue new LIBOR-linked products that will mature after 2021 by 30 June 2021.