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
The Critical Benchmarks (References and Administrators’ Liability) Bill receives its first reading in the House of Lords
Eye on IBOR Transition, 4 October 2021
The Critical Benchmarks (References and Administrators’ Liability) Bill has been drafted to address the risk that LIBOR cessation poses to tough legacy contracts, by ensuring that parties that apply modified LIBOR to their contracts pursuant to FCA exercise of powers will not be subject to claims of breach of contract.
FCA Proposes to Require Publication of Synthetic GBP and JPY LIBOR for Specified Tenors
Eye on IBOR Transition, 4 October 2021
On 29 September 2021 the UK Financial Conduct Authority 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.
United States – Syndicated and Bilateral Loans
White Paper: Across-the-Curve Credit Spread Indexes (AXI)
SOFR Academy, 27 September 2021
Providing key features, construction methodology, scope of use, loan conventions, and more.
Concept Credit Agreement: Term SOFR + AXI
Loan Syndications & Trading Association and SOFR Academy, 27 September 2021
A detailed illustrative example of a credit agreement that references CME Term SOFR + AXI for a syndicated term loan facility denominated in U.S. Dollars.
United States – Derivatives
Letter from ISDA to the Federal Reserve Board of Governors re Fallbacks for ‘Credit Sensitive Rates’
International Swaps and Derivatives Association, 23 September 2021
Responding to a related letter dated 20 September 2021 from the Fed to ISDA re reference to supervisory authorities in the fallback waterfall for BSBY and Ameribor. The Fed’s letter notes that the Fed does not intend to investigate, endorse or recommend a replacement for BSBY, Ameribor or any other credit sensitive rate, and requests that ISDA remove references to the Fed from fallback waterfalls for those rates. ISDA’s letter states its intention to remove such references in applicable benchmarks documentation and that it will publish updates in October.
Term SOFR now available for permissible OTC derivatives
CME Group, 8 September 2021
CME Term SOFR Reference Rates are now available for licensing for use in cash market financial products and OTC derivative products.
United States – General
ARRC Recommends Acting Now to Slow USD LIBOR Use over the Next Six Weeks to be Well-Positioned to Meet Supervisory Guidance by Year-End
Alternative Reference Rates Committee, 14 October 2021
Market participants should proactively slow new use of LIBOR during the final months of 2021, when transition resources may be limited and systems constrained. This will help avoid market liquidity issues and support efforts to safely meet supervisory guidance relating to LIBOR transition.
Summary of the ARRC’s Fallback Recommendations
Alternative Reference Rates Committee, 6 October 2021
Summarizing, in a single document, the decisions that the ARRC has made to date concerning its recommended spread-adjusted fallbacks for contracts referencing U.S. dollar LIBOR, and containing the key details regarding the recommendations that the ARRC has made, or intends to make, in relation to its fallback language and to state legislation that references ARRC-recommended fallbacks.
Goodbye to All That: The End of LIBOR – speech by Fed Vice Chair for Supervision Randal Quarles at the Structured Finance Association Conference
Federal Reserve Board of Governors, 5 October 2021
“The reign of LIBOR will end imminently, and it will not come back. The year of magical thinking is over.”
How to Get Your CME Term SOFR License
Loan Syndications & Trading Association, 27 September 2021
Provides links to a podcast and supporting slides explaining CME Term SOFR Licensing.
Remarks of SEC Chair Gary Gensler Before the Alternative Reference Rates Committee’s SOFR Symposium
Securities and Exchange Commission, 20 September 2021
Again voicing the concern that BSBY has many of the same flaws as LIBOR, in part because both benchmarks are based upon unsecured, term, bank-to-bank lending.
Prepare for Landing – speech by Fed EVP and GC, Michael Held, at the ISDA Benchmark Strategies Forum
Federal Reserve Bank of New York, 15 September 2021
Citing concerns about inertia in the loan market, especially the syndicated loan market, the replacement rates to which firms are transitioning, and how essential it is that any loan contracts maturing after mid-2023 have robust and consistent fallback provisions.
SOFR Spread Solutions: The Price of Imperfection
Loan Syndications & Trading Association, 8 September 2021
Noting that historical (and likely future) difference between LIBOR and SOFR is much wider than the current “LIBOR-SOFR spot spread,” and setting forth four potential approaches to spread adjustments on new SOFR loans, describing the strengths and weaknesses of each.
CME Term SOFR Reference Rates – Terms of Use and FAQs
CME Group, 7 September 2021
Discussing permissible use, licensing, and regulatory status of CME’s Term SOFR.
In Search Of… “Fair” Spread Adjustments for New SOFR Loans
Loan Syndications & Trading Association, 17 August 2021
Data and charts illustrating the difference between the spot LIBOR-SOFR spread adjustment and the long-term historical mean, and suggesting approaches to creating graduated step-ups to “reduce the cliff effect materially.”
Joint Trades Letter in Support of Adjustable Interest Rate (LIBOR) Act
ISDA/LSTA/ABA/SFA/SIFMA/Others, 27 July 2021
“…in this unique, once-in-a-lifetime financial event we find no other feasible option for remediation of these contracts without the risk of significant contractual uncertainty.”
United Kingdom – Derivatives
Policy Statement PS: Derivatives clearing obligation – modifications to reflect interest rate benchmark reform: Amendments to BTS 2015/2205
Bank of England, 29 September 2021
Setting forth the Bank of England’s final policy on the proposal to modify the scope of contracts subject to the derivatives clearing obligation set forth in the related 20 May 2021 Consultation Paper. The final policy removes from the scope of the clearing obligation contracts referencing EONIA, JPY LIBOR and GBP LIBOR, adds certain contracts referencing €STR, and extend the maturity of contracts referencing SONIA.
Consultation Paper - Derivatives clearing obligation – introduction of contracts referencing TONA: Amendment to BTS 2015/2205
Bank of England, 29 September 2021
Setting out the Bank of England’s proposal to add Overnight Index Swaps that reference TONA to the scope of contracts that are subject to the derivatives clearing obligation. Comments are due by 27 October 2021.
Letter from ISDA to the FCA re Fallbacks for ‘Credit Sensitive Rates’
International Swaps and Derivatives Association, 23 September 2021
Responding to a related letter dated 17 September 2021 from FCA to ISDA re Fallbacks to BSBY and compliance with BMR fallback requirements. The FCA letter, like the Federal Reserve letter, states that the FCA does not intend to investigate, endorse or recommend a replacement for BSBY or any other credit sensitive rate, notes the failure of such rates to comply with the requirements of the Benchmarks Regulation, and also recommends that ISDA consider addressing permanent loss of representativeness in related fallback provisions. ISDA’s response states its intention to remove references to the FCA recommending a replacement rate for such credit sensitive rates and outlines planned procedures to work with the Loan Syndications & Trading Association to develop forms that allow the matching of LSTA’s fallback language in hedges referencing credit sensitive rates.
ISDA Letter to FCA re Response to FCA CP21/22 on LIBOR transition and the derivatives trading obligation
International Swaps and Derivatives Association, 25 August 2021
Supporting key elements of Consultation Paper 21/22 to support a smooth transition away from LIBOR-linked products in light of the global nature of derivatives, and requesting that new products be phased into scope.
United Kingdom – General
Consultation Paper CP21/29: Proposed decisions on the use of LIBOR (Articles 23C and 21A BMR)
Financial Conduct Authority, 29 September 2021
Seeking views on the proposed decision to use the powers proposed (and finalized) pursuant to 20 May 2021 Consultation Paper to specify which legacy use of the 1-, 3-, and 6-month sterling and 1-, 3-, and 6-month yen synthetic LIBOR settings the FCA will permit to continue after end-2021.
Further arrangements for the orderly wind-down of LIBOR at end-2021
Financial Conduct Authority, 29 September 2021
Confirming that to avoid disruption to legacy contracts that reference the 1-, 3- and 6-month sterling and Japanese yen LIBOR settings, the FCA will require the LIBOR benchmark administrator to publish these settings under a 'synthetic' methodology, based on term risk-free rates, for the duration of 2022.
Feedback Statement (FS 21/10): FCA use of powers over use of critical benchmarks
Financial Conduct Authority, 29 September 2021
Summarizing consultation feedback and whether and how the FCA may exercise “legacy use” and “new use restriction” powers, as proposed pursuant to Consultation Paper CP21-15. The detailed policies relating to these powers are set forth in Statement of Policy on the FCA’s power under Article 21A BMR. and Statement of Policy on the FCA’s power under Article 23C BMR.
Notice of First Decision – Article 21(3) Benchmarks Regulation
Financial Conduct Authority, 29 September 2021
Setting out the FCA’s decision to compel ICE Benchmark Administration Limited to continue publishing 1-month Sterling LIBOR, 3-month Sterling LIBOR, 6-month Sterling LIBOR, 1-month Yen LIBOR, 3-month Yen LIBOR and 6-month Yen LIBOR for 12 months starting immediately after the final publication of such tenors on 31 December 2021 and before such tenors otherwise would cease.
Notice of Designation – Article 23A Benchmarks Regulation
Financial Conduct Authority, 29 September 2021
Designating 1-month Sterling LIBOR, 3-month Sterling LIBOR, 6-month Sterling LIBOR, 1-month Yen LIBOR, 3-month Yen LIBOR and 6-month Yen LIBOR as “critical benchmarks” under the Benchmarks Regulation effective at 00:01 on 1 January 2022. As a result, all use of these LIBOR tenors by supervised entities is prohibited as of such time, except where the FCA makes exemptions under Article 23C of the Benchmarks Regulation.
Draft Notice of Requirements – Article 23D Benchmarks Regulation
Financial Conduct Authority, 29 September 2021
Imposing requirements on ICE Benchmark Administration Limited, the administrator of LIBOR, to change the way in which 1-month Sterling LIBOR, 3-month Sterling LIBOR, 6-month Sterling LIBOR, 1-month Yen LIBOR, 3-month Yen LIBOR and 6-month Yen LIBOR are determined, and providing related technical specifications.
IBOR Transition: How Ready are We for 2022? – speech of Toby Williams at AFME/IMN Global ABS
Financial Conduct Authority, 17 September 2021
“There is now just over three months to go until the end of LIBOR as we know it. You cannot and should not wait to complete transition. This is probably the most significant transformation in interest rate markets, if not all markets, that we will see in our lifetimes. We would encourage you to do this properly.”
HL Bill 49 - Critical Benchmarks (References and Administrators' Liability) Bill
UK House of Lords, 8 September 2021
A Bill to make provision about the meaning of references to Article 23A benchmarks in contracts and other arrangements; and to make provision about the liability of administrators of Article 23A benchmarks.
Europe – Derivatives
ESMA’s priorities for derivatives – keynote speech of Executive Director Natasha Cazenave at FIA IDX conference
European Securities and Markets Authority, 27 September 2021
Focusing on two elements of ESMA’s priorities: review of the MiFID II/MiFIR Framework and RFR transition in the context of EMIR clearing obligations and MiFIR derivatives trading obligations. “Liquidity is pivoting from the old benchmarks to the new RFRs, and so should the scope of the clearing and trading obligations…. We expect counterparties to be prepared and to make the transition in due course.”
Europe – General
Final Report: Guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation
European Securities and Markets Authority, 24 September 2021
Providing guidance to financial market participants and competent authorities on the application of the requirements relating to the use of a methodology for calculating a benchmark and the related record keeping requirements as well as the requirements on the oversight function. Different aspects of the guidelines apply to critical, significant, and non-significant benchmarks.
Asia and Pacific Rim – Floating Rate Notes and Bonds
Guide to Tough Legacy Bonds in Asia-Pacific
International Capital Market Association and Bloomberg, 25 May 2021
Designed to help market participants and regulatory authorities in the Asia Pacific region to identify the critical issues and understand what is needed to drive transition away from LIBOR.
Asia and Pacific Rim – Derivatives
Statement on the Cessation on the initiation of new interest rate swaps referencing JPY LIBOR
Bank of Japan, 28 September 2021
No new post-2022 JPY LIBOR-referencing swaps after 30 September 2021, and no JPY LIBOR-referencing interest rate swap quoting conventions after 30 September 2021.
Asia and Pacific Rim – General
Public Consultation on the Treatment of Tough Legacy Contracts in Japan
Bank of Japan, 28 September 2021
Seeking comments from a wide range of relevant parties on (1) the basic concept on specifying tough legacy contracts for which the adoption of synthetic yen LIBOR may be considered and (2) points to note when adopting the synthetic yen LIBOR. Comments due by 19 October 2021.
Letter to Authorized Institutions re Reform of Interest Rate Benchmarks
Hong Kong Monetary Authority, 14 September 2021
Voicing support for the TMA/APLMA joint publication, The end of LIBOR, and noting that authorized institutions are “expected to make effective use” of the publication and proactively engage their customers in transitioning to alternative rates.
The end of LIBOR
Treasury Markets Association and Asia Pacific Loan Market Association, 14 September 2021
Setting out various options available to market participants for replacing US dollar LIBOR in loan contracts—Term SOFR, Daily SOFR Compounded in Arrears, Daily Simple SOFR, SOFR in Advance, and Credit Sensitive Rates—and briefly describing the characteristics and considerations of each.
Media Release 2021-20: Robust Fallbacks Required for BBSW Securities
Reserve Bank of Australia, 13 September 2021
Introducing new eligibility criteria for securities to be accepted as collateral in the Reserve Bank's market operations. Floating rate notes and marketed asset-backed securities issued on or after 1 December 2022 that reference BBSW must include robust fallback provisions, and all self-securitisations, regardless of the date of issue, must include robust fallback provisions (although the Reserve Bank will engage directly with self-securitisation issuers and give at least 12 months' notice before enforcing this requirement).
Developments in Japanese Yen LIBOR transition: the Japanese perspective
International Capital Market Association, 8 July 2021
Highlighting some of the latest initiatives in the development of the Japanese yen LIBOR alternative risk-free rate, and in Japanese yen LIBOR transition.
Global – Floating Rate Notes and Bonds
The transition from LIBOR: “tough legacy” bonds
International Capital Market Association, 12 October 2021
Explaining the reasons there is a tough legacy problem in the bond market; what the bond market has done to address the problem; how the authorities are proposing to help address the problem through legislative proposals for the orderly wind-down of LIBOR; and whether tough legacy bonds are being addressed in a consistent way internationally. Article begins on page 8.
The orderly wind-down of LIBOR in the bond market
International Capital Market Association, 8 July 2021
Focusing on plans for the orderly wind-down of LIBOR in the Sterling bond market under English law.
Global – Derivatives
RFR Conventions and IBOR Fallbacks – Product Table
International Swaps and Derivatives Association, 4 October 2021
Providing a table that sets out how ISDA’s IBOR fallbacks in its amended documentation function for various products.
Letter from ISDA to the FCA re Fallbacks for ‘Credit Sensitive Rates’
International Swaps and Derivatives Association, 23 September 2021
Responding to a related letter dated 17 September 2021 from FCA to ISDA re Fallbacks to BSBY and compliance with BMR fallback requirements. The FCA letter, like the Federal Reserve letter, states that the FCA does not intend to investigate, endorse or recommend a replacement for BSBY or any other credit sensitive rate, notes the failure of such rates to comply with the requirements of the Benchmarks Regulation, and also recommends that ISDA consider addressing permanent loss of representativeness in related fallback provisions. ISDA’s response states its intention to remove references to the FCA recommending a replacement rate for such credit sensitive rates and outlines planned procedures to work with Loan Syndications & Trading Association to develop forms that allow the matching of LSTA’s fallback language in hedges referencing credit sensitive rates.
Letter from ISDA to the Federal Reserve Board of Governors re Fallbacks for ‘Credit Sensitive Rates’
International Swaps and Derivatives Association, 23 September 2021
Responding to a related letter dated 20 September 2021 from the Fed to ISDA re reference to supervisory authorities in the fallback waterfall for BSBY and Ameribor. The Fed’s letter notes that the Fed does not intend to investigate, endorse or recommend a replacement for BSBY, Ameribor or any other credit sensitive rate, and requests that ISDA remove references to the Fed from fallback waterfalls for those rates. ISDA’s letter states its intention to remove such references in applicable benchmarks documentation and that it will publish updates in October.
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.
Requirements of Regulators Around the World – UK, EU, Asia, and US
Webinar, 30 September 2021
Comparing regional regulatory regimes and the status of legislation to facilitate IBOR transition.
IBOR Transition – an introduction to conduct risk
Webinar, 16 September 2021
Mayer Brown partner Marlon Paz, and head of Legal Project Management David George, discusses IBOR transition conduct risk and related risk mitigation in the first of our latest IBOR transition webinar series. With approximately 100 days until most LIBOR tenors cease to be published, additional topics to be covered during 4Q2021 include global transition regulatory requirements, industry- and subject matter-specific considerations, litigation risks, and final transition preparation tips.
SOFR Deals
Webinar, 13 September 2021
Join Mayer Brown attorneys Brad Berman, Ryan Castillo, and Jerry Marlatt, who will discuss the Secured Overnight Financing Rates (SOFR) as a LIBOR replacement, including an overview of the progress and hurdles to date. Specific topics include:
- The development of SOFR as a benchmark, including term SOFR
- ARRC statements on SOFR
- The mechanics of SOFR and examples of SOFR offerings
- Alternatives to SOFR
