A new era has begun! Although the key LIBORs now have transitioned to risk-free replacement rates, global transition activity continues with respect to other interbank offered, and similar, rates, and we will continue to update you on these developments.
The IBOR Transition Digest is a periodic compendium of global regulatory and market developments and insights on the complex issues confronting financial market participants as they continue to transition from LIBOR and its variants to replacement benchmark interest rates. With 30 June 2023 quickly approaching, 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
A New Beginning … And an Ending
Eye on IBOR Transition blog, 18 August 2023
Summarizing the current status of IBOR transition and announcing the retirement of our Eye on IBOR Transition blog. This IBOR Digest will continue as our primary vehicle for delivering current market updates and analysis to you.
View all of our IBOR transition thought leadership under the Perspectives tab of our IBOR Transition portal page. Our Eye on IBOR Transition blog, with three years of our analysis and commentary during the key transition years, has been retired but remains available for future reference.
United States – General
Joint Statement by Invesco Indexing LLC and SOFR Academy, Inc. re IOSCO Statement
Invesco Indexing LLC and SOFR Academy, Inc., 31 July 2023
Acknowledging that while neither the USD Across-the-Curve Credit Spread Indexes (AXI) or the USD Financial Conditions Credit Spread Indexes (FXI) were included in the scope of IOSCO’s review, the administrators of AXI and FXI recognize the recommendations made to relevant administrators and intend to continue to provide transparency into how AXI and FXI are constructed, and to develop and maintain all indexes “in compliance with the highest international standards and requirements.”
ARRC July 31 Meeting Readout
Alternative Reference Rates Committee, 31 July 2023
ARRC members characterized the passage of the 30 June 2023 LIBOR transition milestone as smooth and uneventful. The implementation of fallbacks and LIBOR replacements under the LIBOR Act occurred without issue. The LSTA noted the significant uptick in loan fallback amendments in June and highlighted that most leveraged loans and collateralized loan obligations have transitioned to SOFR going forward but will continue to pay LIBOR until their next rate reset date, which generally will be one or three months after LIBOR cessation.
Financial Stability Oversight Council Meeting
U.S. Department of the Treasury, 28 July 2023
The principals reported on the transition away from LIBOR: (a) the transition generally was successful; (b) SOFR is a resilient and sound key benchmark; (c) the recent IOSCO review and related statement was consistent with the ARRC’s conclusion that CD and commercial paper markets are too thin to create a robust interest rate, especially in times of stress; (d) Term SOFR use should remain limited; and (e) all new contracts should include robust fallbacks and follow the ARRC recommendations to avoid repeating LIBOR mistakes. SEC Chair Gensler again called out BSBY specifically as suffering “infirmities that will not stand the test of time,” and stated, with respect to the 15-year LIBOR transition, “we don’t want to do this thing again.” The discussion of LIBOR starts at 28:46.
BSBY Bulletin -- Underlying Volumes, Resiliency in Periods of Stress and Current Landscape
Bloomberg Professional Services, 11 July 2023
Outlines BSBY’s 18-month performance, including during the March 2023 bank failures, and explains volume thresholds—specifically CD and commercial paper volumes, which are a focus of CSR criticism—and the 6-step waterfall if liquidity is challenged, which has not happened to date. BSBY is described as “well positioned to complement the primary and predominant benchmark, SOFR.”
AFX IOSCO Holding Statement
American Financial Exchange, 10 July 2023
Providing “important context and perspective” regarding IOSCO’s 3 July statement criticizing Ameribor’s compliance with IOSCO principles. AFX states that independent risk and accounting firms have found Ameribor compliant with IOSCO principles but it will address specifically the three areas of concern noted by IOSCO in its statement.
And Just Like That … LIBOR Ended
Loan Syndications & Trading Association, 5 July 2023
Summarizing the status of LIBOR transition and commenting on the 3 July IOSCO statement.
With LIBOR’s Long-Awaited Sunset, the Future of Interest Rate Benchmarking Must Be Defined by Choice
American Financial Exchange, 30 June 2023
Arguing, “many US financial institutions are not active in the repo market and do not have large positions in government securities – they can borrow only on an unsecured basis and therefore need a rate that better reflects this segment of the market and funding risk. That means that the industry’s use of SOFR – which is used to determine the interest rates and borrowing costs for approximately 95% of U.S. loans, according to Reuters – does not fully reflect the borrowing costs of the entirety of US capital market participants.”
ARRC June 22 Meeting Readout
Alternative Reference Rates Committee, 22 June 2023
Noting the continued progress in the transition from LIBOR to SOFR, as shown in attached charts. Data from cash and derivatives markets show continued momentum, with SOFR predominant across both cash and derivatives markets. LSTA advised, among other things, that while the majority of LIBOR-linked Collateralized Loan Obligations (CLOs) have not yet reached the 50 percent threshold of underlying loans transitioning away from LIBOR, where the CLO itself would then also become eligible to transition away from LIBOR, most CLO notes have been prepared to transition on or around June 30, according to a major trustee. Additionally, the ARRC recommended that all determining persons, agents, and other parties responsible for disseminating information use the DTCC LIBOR Replacement Index Communication Tool for communicating replacement rates and conforming changes.
LIBOR Countdown!
Loan Syndications & Trading Association, 21 June 2023
Estimating that roughly 65% of outstanding loans have transitioned away from LIBOR, even if a number will continue to pay interest based on LIBOR until the end of the current interest period.
Canada – Syndicated and Bilateral Loans
CARR publishes its recommendations for transitioning loans from CDOR to CORRA and provides a “no new CDOR or BA loan” milestone
Canadian Alternative Reference Rate Working Group, 27 July 2023
CARR has published three documents to aid in the transition away from CDOR and the bankers’ acceptance (BA) rate, and has established a milestone of 1 November 2023, after which no new CDOR or BA loans are to be issued, and all new loan contracts must reference CORRA, Term CORRA or prime only. Examples of permitted activities is provided.
Transitioning Loans from CDOR to CORRA – Best Practices
Canadian Alternative Reference Rate Working Group, 27 July 2023
Topics discussed include: key differences between CDOR, CORRA, and Term CORRA; best practices and considerations for remediation; loan hedges; and operational considerations.
Recommended CORRA loan agreement definitions and loan mechanics
Canadian Alternative Reference Rate Working Group, 27 July 2023
Providing an example of the definitions and provisions that can be included in credit agreements that reference the Canadian Overnight Repo Rate Average (CORRA). Related loan mechanics necessary for a CORRA-based loan to operate are included. Of note is the “Rate Flip” concept, which would allow a borrower to elect to change the CORRA rate option (Term CORRA and Daily Compounded CORRA) during the life of the loan without reopening the credit agreement. The Rate Flip was created in response to an emerging US trend of certain borrowers amending their credit agreement to replace Term SOFR with Daily SOFR as a result of lower hedging costs for Daily SOFR.
CORRA loan conventions comparison table
Canadian Alternative Reference Rate Working Group, 27 July 2023
Comparing CARR’s recommended conventions for loans referencing overnight CORRA compounded-in-arrears and Term CORRA.
Canada – General
Term CORRA to be launched on September 5, 2023
Canadian Alternative Reference Rate Working Group, 10 August 2023
The publication of 1- and 3-month Term CORRA will commence on 5 September 2023. Use will be restricted, similar to Term SOFR, and a license will be required to reference the rate and access real-time data. CanDeal Benchmark Solutions, which helped implement the recommended calculation methodology, and TMX Datalinx, which will distribute the Term CORR rate, each also issued press releases announcing the coming publication.
CARR begins publishing CDOR transition related FAQs
Canadian Alternative Reference Rate Working Group, 2 August 2023
The FAQs cover several key issues often the source of inquiries, including on the overall transition, derivatives, loans, fallback language, CORRA, Term CORRA, and the disappearance of bankers’ acceptances.
CDOR Transition FAQs
Canadian Alternative Reference Rate Working Group, 2 August 2023
The FAQs address questions frequently sent to CARR and its members and will be updated regularly. Topics covered include general questions, loans, derivatives, fallback language, CORRA and Term CORRA construction and use, and the fate of the BA rate option.
CARR releases its recommendations for legacy securities tied to CDOR
Canadian Alternative Reference Rate Working Group, 30 June 2023
CARR’s analysis has found that the exposure and number of tough legacy securities is comparatively small and, given this small size, that the “legislative solutions” seen in other jurisdictions are not necessary for the Canadian market. CARR, however, does recommend adherence to the ISDA protocol for legacy contracts written under ISDA documentation.
Analysis and recommendations on CDOR Legacy Securities
Canadian Alternative Reference Rate Working Group, 30 June 2023
Recommending, for the ~C$18 billion volume of legacy CDOR securities, that market participants conduct consent solicitations or call or tender for affected securities prior to the CDOR cessation date of 28 June 2024.
Minutes of the Canadian Alternative Reference Rate Working Group
Canadian Alternative Reference Rate Working Group, 26 June 2023
A topic of note was an overview of the June 2023 BAX Fallback Provision & Implementation Plan, pursuant to which TMX Group will convert all eligible 3-month Bankers’ Acceptance Futures into equivalent 3-month CORRA futures contracts in the second quarter of 2024.
CDOR Transition – Implications for transactions as stage 1 ends and stage 2 begins
Canadian Alternative Reference Rate Working Group, 9 June 2023
Highlighting that the first stage of CARR’s two-staged transition plan would be completed on 30 June 2023, with market participants expected to have transitioned virtually all new derivative and securities transactions to CORRA. The second stage—involving lending activity and specified excepted derivatives and securities transactions—will end on 28 June 2024.
UK – General
The US dollar LIBOR panel has now ceased
Financial Conduct Authority, 3 July 2023
The overnight and 12-month US dollar LIBOR settings have now permanently ceased, and the 1-, 3- and 6-month US dollar LIBOR settings have been designated as Article 23A benchmarks and are being published by LIBOR’s administrator, ICE Benchmark Administration, using a synthetic methodology based on the relevant CME Term SOFR Reference Rate plus the respective ISDA fixed spread adjustment. As with other synthetic LIBOR rates, these settings are now permanently unrepresentative of the underlying markets they previously sought to measure and are intended to cease at end-September 2024, in line with FCA’s April 2023 statement. All new use of synthetic US dollar LIBOR is now prohibited under the Benchmarks Regulation.
ARTICLE 23D BENCHMARKS REGULATION – Notice of Requirements
Financial Conduct Authority, 1 July 2023
Imposing requirements, and providing related technical specification, on ICE Benchmark Administration to change the way in which 1-, 3-, and 6-month USD LIBOR are determined.
ARTICLE 23C BENCHMARKS REGULATION – Notice of Permitted Legacy Use by Supervised Entities
Financial Conduct Authority, 1 July 2023
Permitting all legacy use of the unrepresentative, synthetic 1-, 3-, and 6-month USD LIBOR settings by supervised entities other than in cleared derivatives (whether directly or indirectly cleared) until the end of September 2024.
ANNEX 4 BENCHMARKS REGULATION – Notice of Modifications
Financial Conduct Authority, 1 July 2023
Modifying the provisions of the Benchmark Regulation and related regulations identified in the notice because they no longer will be applicable or proportionate to apply to USD LIBOR in their current form from 1 July 2023 as a result of USD LIBOR no longer being representative.
ANNEX 4 BENCHMARKS REGULATION – Additional Notice of Proposed Modifications
Financial Conduct Authority, 1 July 2023
Modifying specified provisions of the Benchmark Regulation and related regulations, as proposed on 31 May 2023, because they no longer will be applicable or proportionate to apply to USD LIBOR in their current form from 1 July 2023 as a result of USD LIBOR no longer being representative.
Europe – General
Minutes of the 13 July Working Group Meeting
Working Group on Euro Risk-Free Rates, 14 August 2023
Discussion focused on recent work by the €STR Task Force, including publication of a final statement by the working group containing recommendations regarding the use of €STR, including Term €STR, in new cash products, and milestones achieved generally by the working group. It was suggested that the final statement might solicit opinions regarding the viability and future of EURIBOR, but the group agreed that this topic requires further working group discussion and is for another day. EURIBOR fallbacks and related spread adjustments also were discussed, including a proposed market survey.
Asia & Pacific Rim – Syndicated and Bilateral Loans
Final Transition Approach for SIBOR Loans to SORA
Steering Committee for the SOR & SIBOR Transition to SORA, 30 June 2023
The Steering Committee for SOR & SIBOR Transition to SORA published its response to the March 2023 consultation on SIBOR to SORA loan adjustment spreads, which will allow the industry to complete its transition from SIBOR, ahead of SIBOR’s discontinuation after 31 December 2024.
Adjustment Spreads for the Conversion of SIBOR Loans to SORA - Response to Consultation Feedback and Final Recommendations
Steering Committee for the SOR & SIBOR Transition to SORA, 30 June 2023
Outlining the transition approach for corporate and retail loans. For corporate loans, adjustment spreads based on the 5-year historical median spreads between SIBOR and compounded SORA are recommended. Transition should occur during the time period between 1 September 2023 and 30 June 2024. For retail loans, a two-phase approach is recommended: (a) an active transition phase from 1 September 2023 to 30 April 2023, during which retail SIBOR loans will convert to 3-month compounded-in-advance SORA plus an adjustment spread calculated as the average difference between SIBOR and compounded-in advance SORA over the preceding three-month period (plus the existing margin) and (b) an automatic conversion phase between 1 June 2024 and 30 June 2024, when any retail SIBOR loans not previously converted to SORA will convert to 3-month compounded-in-advance SORA plus an adjustment spread based on the 5-year historical median spreads between SIBOR and compounded SORA.
Asia & Pacific Rim – Floating Rate Notes and Bonds
Guidance on Spread Adjustments for the Transition of Legacy Fixed Rate Debt Securities Referencing SOR IRS
Steering Committee for the SOR & SIBOR Transition to SORA, 13 June 2023
Setting out guidance in formulating an adjustment spread for the transition of fixed rate debt securities referencing SOR interest rate swaps to instead reference SORA overnight index swaps. The guidance differentiates between floating rate securities that reference the corresponding tenors of SOR and which typically have a fixed maturity date, and resettable fixed rate securities that reference SOR IRS which have a fixed maturity date or are perpetual in nature and have a callable and resettable feature.
Asia & Pacific Rim – General
Public Consultation on permanent cessation of Euroyen TIBOR and related issues
JBA TIBOR Administration, 1 August 2023
Seeking market feedback on whether publication of Euroyen TIBOR should cease permanently, and, if so, the timing of such cessation. JBATA expects to publish consultation results by 31 March 2024.
ISDA Statement on JBATA Consultation on Euroyen TIBOR
International Swaps and Derivatives Association, 1 August 2023
Confirming that publication of the consultation does not constitute an index cessation event, and does not trigger related fallbacks under the ISDA 2020 IBOR Fallbacks Protocol and related definitions.
Notice of Publication of MAS Recommended Rate by Bloomberg Index Services Limited
Steering Committee for the SOR & SIBOR Transition to SORA, 10 July 2023
On 27 June 2023, Bloomberg Index Services Limited began publishing the MAS Recommended Rate, including the Adjusted Risk-Free Rate and the related Spread Adjustment. In connection with the publication, Bloomberg updated its IBOR Fallback Rate Adjustments Rule Book, IBOR Fallback Rate Adjustments FAQs, and Fact Sheet – IBOR Fallbacks, and issued Technical Note – IBOR Fallbacks: Introduction of Additional ISDA IBOR Fallbacks.
Adjustment Spread Calculator for Active Transition of Institutional SOR Contracts
Steering Committee for the SOR & SIBOR Transition to SORA, 26 June 2023
Used to calculate the SIBOR to SOR adjustment spreads for unhedged loans. For hedged loans and other instruments that involve derivatives, the calculator can be used as a starting point for counterparty negotiations.
Global – Derivatives
ISDA-Clarus RFR Adoption Indicator – July 2023
International Swaps and Derivatives Association, 14 August 2023
Tracks how much global trading activity (as measured by DV01) is conducted in cleared over-the-counter (OTC) and exchange-traded interest rate derivatives (IRD) that reference the identified risk-free rates (RFRs) in eight major currencies. The July indicator show modest but continuing transition progress.
ISDA Fallbacks vs. CCP Conversion – Worked Example
International Swaps and Derivatives Association, Updated 26 June 2023
A hypothetical worked example to illustrate an individual interest period for: (i) an original 3-month USD LIBOR contract; (ii) the original contract with ISDA Fallback applied (as if the period was beyond cessation); and (iii) the SOFR contract generated under CCP conversion processes (as if the period was beyond cessation).
Global – General
Final Reflections on the LIBOR Transition
Financial Stability Board, 28 July 2023
Emphasizing two key messages: Market participants are encouraged to (a) use benchmarks that are robust, suitable, sustainable and compatible with relevant guidance and regulation and (b) incorporate robust contractual fallback benchmark rates in their contracts.
Statement on Alternatives to USD LIBOR
International Organization of Securities Commissions, 3 July 2023
Stating that a recently completed Review of Alternatives to USD LIBOR, involving BSBY, Ameribor, CME Term SOFR and IBA Term SOFR, confirmed regulatory authorities’ concerns that certain CSRs currently in use exhibit some of the same inherent “inverted pyramid” weaknesses as LIBOR and their use may threaten market integrity. The Statement also provided specific disclosure and licensing recommendations, and advised that the administrators of those rates “refrain from any representation that the CSRs reviewed are ‘IOSCO-compliant’.”
MAYER BROWN EVENTS
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.
