LIBOR Transition Advisory Newsletter - April 2021

The Alternative Reference Rates Committee (ARRC) recently made a series of announcements providing further clarity on their recommended transition to SOFR. On March 23, they announced they will not be in a position to recommend a forward-looking Secured Overnight Financing Rate (SOFR) term rate by mid-2021 and encouraged market participants to continue to transition from LIBOR using the tools available now. In parallel, the ARRC published a white paper that outlines the model for using SOFR in non-CLO Asset-Backed Securities (ABS), mortgage-backed securities and commercial mortgage-backed securities products. The paper details new issuance of ABS products using 30-day average SOFR, with a monthly reset, set in advance of the interest accrual period with the 30 day average SOFR rate determined based on the daily published SOFR rolling averages on the New York Federal Reserve’s website.

Along with the postponement of a forward looking SOFR term rate, the ARRC also announced the selection of Refinitiv, a London Stock Exchange Group business, to publish recommended spread adjustments and spread-adjusted SOFR rates for cash products beginning in June. Refinitiv will make the spreads and spread-adjusted rates readily accessible daily to the general public without cost.

Additionally, New York State Governor Andrew Cuomo signed LIBOR legislation into law—a step that will help to minimize legal uncertainty and adverse economic impacts associated with the transition from LIBOR. This new law addresses the issue of legacy contracts that mature after mid-2023 and do not have effective fallbacks, and should reduce operational and legal risks for market participants and help with a seamless transition.

We expect an increase in pressure to accelerate the transition of both new issuance and legacy instruments ahead of the December 31, 2021 deadline.

LIBOR Highlights

General News 

Webinar Replay: LIBOR Transition for Financial and Non-Financial Institutions, from the Kroll team: Jennifer Press, Marcus Morton, Mark Turner and Rich Vestuto 

• Our LIBOR Transition Advisory Team hosted two webinars focusing on LIBOR transition issues for financial and non-financial institutions. Panellists discussed important developments in the LIBOR transition and how Kroll is assisting clients in the transition.

Nearly Half of Firms Recently Surveyed Still Do Not Have LIBOR Transition Plans in Place, from the Kroll Team: Jennifer Press, Marcus Morton, Mark Turner and Rich Vestuto

• Our LIBOR Transition Advisory Team provide insights based on a survey from their recent webinars as to where organizations stand in their LIBOR transitions. This survey that revealed that 50% of organizations still do not have a firm LIBOR transition plan in place. This data has been compared to a similar, previous poll taken from a webinar in September 2020.

The End of LIBOR Is a Certainty, From Florian Nitschke, Director in the Compliance and Regulatory Consulting Practice at Kroll, Funds Europe 

• The FCA recently made it clear that LIBOR will cease to be accepted as a benchmark, but there is now more certainty about how market participants should proceed, says Nitschke.

Market Details 

ARRC Publishes White Paper on Suggested Fallback Formula for the USD LIBOR ICE Swap Rate, ARRC

• The ARRC published a white paper that describes the formula to adjust USD LIBOR ICE Swap Rates to spread-adjusted SOFR Swap Rates.  The paper is intended to facilitate conversations between counterparties on incorporating robust fallbacks in both legacy and new contracts referencing the USD LIBOR ICE Swap Rate.

ARRC Releases Supplemental Recommendation of Hardwired Fallback Language for Business Loans, ARRC

• The ARRC has released supplemental versions of its recommendation of hardwired fallback language for USD LIBOR denominated syndicated and bilateral business loans. The supplemental recommendation for business loans sets out abridged versions of the 2020 fallback language for syndicated business loans and bilateral business loans incorporating the certainty on fallback timing and economics afforded by the March 5 announcements.

Adoption of RFRs: Major Developments in 2021, ISDA

• This white paper examines several major developments in 2021 that have been announced and/or are expected to occur related to the adoption of replacement benchmarks such as risk-free rates (RFRs). It also reviews the significant progress made on the transition from LIBOR and other IBORs to RFRs in 2020.

The Bank, the FCA and the Working Group Welcome the Publication of the FMSB’s Transparency Draft of Its Market Standard on Use of Term SONIA Reference Rates., FCA

• The Working Group on Sterling Risk-Free Reference Rates, the Financial Conduct Authority and the Bank of England welcome the publication from the FICC Markets Standards Board (FMSB) of a proposed standard recognizing the conduct and systemic risk advantages associated with a broad-based adoption of SONIA compounded in arrears and considering selected use cases for term SONIA reference rates in sterling markets where there is a robust rationale to meet specific needs.

Regulatory Updates 

New York Legislature Passes SFA Supported LIBOR Transition Bill, Structured Finance Association (SFA)

• New York State Governor Andrew Cuomo signed LIBOR legislation into law. The bill was presented by the ARRC, and supported by the SFA, to clarify and promote financial stability as market participants prepare for the discontinuation of LIBOR.  The SFA continues to advocate for federal legislation in Congress that comprehensively addresses inadequate LIBOR fallback provisions and applies a consistent, fair approach to all legacy LIBOR contracts governed under U.S. law but the New York legislation is expected to help minimize legal uncertainty and adverse economic impacts associated with the transition from LIBOR. 

UK Regulators Urge Sterling Derivatives Providers to Switch from LIBOR, Finance Magnates Comments

• The mega regulators recommend adopting new quoting conventions for inter-dealer trading based on SONIA, effective May 12. Instead of interbank offered rates, this step facilitates a further shift in market liquidity toward SONIA, bringing benefits for a wide range of users as they move away from LIBOR.

Fed's Quarles Warns Banks Face Intense Regulatory Scrutiny in Move Away From LIBOR, Reuters

• Federal Reserve Vice Chair Randal Quarles warned that banks must accelerate efforts to detach their business rates from Libor interest rate benchmarks, going so far as to caution the “safety and soundness” of banks could come into question if still using the tarnished benchmark in 2022.

BOE Threatens Banker Bonuses Over Pace of Libor Transition, Bloomberg

• The Bank of England and Financial Conduct Authority warned chief executives in a letter that they were intensifying scrutiny of Libor transition plans at financial firms and said managers who fall short should get smaller bonuses.