LIBOR Transition Advisory Newsletter - November 2021

After last month’s announcement of the broad use of synthetic rates for non-USD LIBOR rates, the focus for this month has been on the development of the underlying markets and, more specifically, the term rates for the new risk-free rates, as well as increased focus on the currencies outside of dollars and sterling that are impacted by the cessation of LIBOR with the announcement of the preferred replacement rates for Swiss franc and euro LIBORs.  We have also seen further guidance issued for the transition of loans, long seen as being an area that was lagging in the transition.

There is also now a focus on ensuring that firms are operationally ready to transact in the new risk-free rates as new issuance will not be permitted to use the synthetic replacement rates after December 31, 2021, now less than 2 months away.

LIBOR Highlights

General News

ARRC Announces the Sixth Event in its Series “The SOFR Symposium: The Final Year”, ARRC

• Conducted on October 26, 2021, featured remarks included Acting Comptroller of the Currency Michael J. Hsu and highlighted views from banks and borrowers on their preparedness for no new LIBOR by year-end.

Experts Testify Before Senate Banking Committee on LIBOR Transition, Mondaq

• At a hearing on the LIBOR transition before the Senate Committee on Banking, Housing and Urban Affairs, ARRC Chair Thomas Wipf advocated for congressional passage of uniform, federal legislation to address LIBOR legacy contract transition issues and "avoid the disruptions, market uncertainties and confusion that would otherwise occur when LIBOR ends."

Morgan Stanley’s Robot Libor Lawyers Saved 50,000 Hours of Work, Bloomberg

• Morgan Stanley figures it’s saved legal staffers 50,000 hours of work and $10 million in attorney fees by using robot LIBOR lawyers instead of only the human kind.

Reform of Interest Rate Benchmarks, Hong Kong Monetary Authority

• The Hong Kong Monetary Authority (HKMA) issued a circular outlining the exceptional circumstances in which banks can continue to issue new USD LIBOR-linked contracts after 2021. HKMA has required authorized institutions to cease entering new LIBOR contracts after 2021 but acknowledges certain risk management related exceptions.

Market Details

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, ARRC

• The ARRC recommends that all market participants act now to slow their use of U.S. dollar (USD) LIBOR and leverage the next six weeks as a key window to reduce such activity to promote a smooth end to new LIBOR contracts by the end of the year.

Transitioning Legacy LIBOR Syndicated Loan Facilities to Compounded Risk-free Reference Rates – Practical Guidance for the Documentary Amendment Process, Loan Market Association

• The Loan Market Association published practical guidance for the documentary amendment process when transitioning legacy LIBOR syndicated loan facilities to compounded risk-free rates. While the guidance is not exhaustive, it identifies key factors to help market participants facilitate and streamline the amendment process.

Refinitiv Launches USD IBOR Cash Fallbacks Prototype to Facilitate Industry Transition From USD LIBOR, Refinitiv

• Refinitiv launched a prototype publication of the ARRC’s recommended spread adjustments and spread adjusted rates for cash products. The launch follows the ARRC’s March 2021 announcement that it had selected Refinitiv to publish LIBOR cash fallback spreads and rates. The initial prototype will not have fallbacks based on the SOFR term rate, but Refinitiv will include them in a second iteration based on the ARRC’s recommendation of the CME term rates.

Libor Transition Vexes Collateralized Loan Obligations Market, Wall Street Journal

• While some parties have moved swiftly to adopt a replacement for the interest-rate benchmark, low-rated borrowers and CLOs have been slower to adapt.

Refinitiv Launches Regulated Tokyo Swap Rate (for Swaps Referencing TONA) to Facilitate Industry Transition From LIBOR, Refinitiv

• To support the market transition away from LIBOR and adopt new market conventions, Refinitiv has introduced the new production Tokyo Swap Rate (for swaps referencing TONA) benchmark. The production benchmark is administered by Refinitiv Benchmark Services (UK) Limited (RBSL) in compliance with the UK Benchmark Regulation and is available in tenors from 1-year to 40-years based upon dealer-to-client quotes in centrally cleared spot starting TONA OIS.

Regulatory Updates

LIBOR and the FCA's New Powers Under the UK Benchmarks Regulation: Questions and Answers, FCA

• Questions and answers for firms related to the use of our powers under the UK Benchmarks Regulation (BMR), and publications on 29 September 2021, to help manage an orderly wind-down of LIBOR.

ISDA 2021 EONIA Collateral Agreement Fallbacks Protocol, ISDA

• ISDA published the ISDA 2021 European overnight index average (EONIA) Collateral Agreements Fallbacks Protocol to assist with amending the terms of certain ISDA collateral agreements. Market participants can use the protocol to have legacy EONIA contracts fallback to the euro short-term rate (€STR) plus 8.5 basis points when EONIA is discontinued.

Financial stability: Commission designates replacement rates for EONIA and CHF LIBOR, EU Reporter

• The Commission has nominated the replacement rates for two interest rate benchmarks, the Swiss Franc London Interbank Offered Rate (CHF LIBOR) and the Euro Overnight Index Average (EONIA). For CHF LIBOR, the nominated replacement rate is the new Swiss Franc risk-free rate SARON. EONIA references will be replaced by references to the euro risk-free rate €STR. In both cases, an adjustment spread is applied so that undue value transfer is limited.