LIBOR Transition Advisory Newsletter – December 2020

December saw a large amount of activity in the LIBOR transition with announcements and milestones impacting all products and regions. In the U.S., plans were announced to consult on specific timing for ceasing the publication of USD LIBOR, with proposed end dates of December 31, 2021 for one week and two-month USD LIBOR settings, and an extension to June 30, 2023 for other USD LIBOR settings. The announcement was coupled with supervisory guidance encouraging banks to stop new USD LIBOR issuances as soon as practicable but no later than the end of 2021. Together, this is in support of a smoother transition for legacy contracts by allowing time for more to mature before USD LIBOR is proposed to cease, subject to consultation outcomes. This development followed an earlier ICE Benchmark Administration (IBA) announcement about consultations on its intention to cease the publication of all GBP, EUR, CHF and JPY LIBOR settings immediately following December 31, 2021.

LIBOR Highlights 

Regulatory Updates

Statement on LIBOR Transition and Consultation on Potential Cessation , Federal Reserve, ICE

• ICE Benchmark Administration, the administrator of LIBOR, has announced it will shortly consult on its intention to cease the publication of LIBOR in all currencies but USD. For USD, discussions with panel banks and the regulators are still ongoing. Effectively, assuming the consultation responses support extending, most of USD LIBOR will continue for 1 ½ years longer than the other currencies, until June 30, 2023. Extending the publication of certain USD LIBOR would allow more legacy USD LIBOR contracts to mature before LIBOR experiences any disruptions. While this was welcomed by regulators on both sides of the Atlantic, they stressed that banks should still plan to migrate contracts away from LIBOR as soon as possible with bank regulators encouraging all banks to complete their transitions by the end of 2021.

ECB-Backed Body Studies Euribor Exit for $214 Trillion in Assets, Bloomberg

• Euribor is not currently expected to stop publication at the end of 2021 but developments in the transition of USD and STG LIBOR transition has prompted the ECB to consider what an exit might look like if Euribor were to cease.

FSB sets out progress on interest rate benchmark reform, FSB

• At the end of November, the FSB provided a comprehensive overview on the current status of the LIBOR transition

Interest Rate Benchmark Reform (Preparedness for the Discontinuation of LIBOR), Bank of Japan

• A landing page updated by the Bank of Japan that includes various links and publications related to interest rate benchmark reform in Japan. Resources include recent speeches and statements, survey results on the use of LIBOR and other releases such as financial system reports and examination policy letters.

Reform of Interest Rate Benchmarks, Hong Kong Monetary Authority

• An overview released by the Hong Kong Monetary Authority on the Hong Kong banking sector’s preparedness for the LIBOR transition. Updates include statistics related to the sector’s exposures to LIBOR contracts, transition milestones and transition plan preparedness initiatives.

IBOR Transition, AFMA

• A resource for developments regarding benchmarks relating to the IBOR transition published by the Australian Financial Markets Association.

Cash Market Details

Lending Standards Board and UK Finance publish guidance for LIBOR transition, The LSB

• UK Lending Standards Board and UK Finance issue joint guidance on the LIBOR transition for SME borrowers covering alternative reference rates, customer engagement, how to address legacy LIBOR contracts and project governance.

ARRC Releases Conventions for Using SOFR in Arrears in Bilateral Business Loans, ARRC

• Marking another key LIBOR transition milestone for the year, on November 25, 2020, the ARRC released conventions for using the SOFR in arrears in bilateral business loans. These conventions address both new loans that are originated using SOFR, and loans that “fall back” from LIBOR to SOFR in arrears upon LIBOR cessation or being deemed unrepresentative.
• The conventions recommended for bilateral business loans are similar to the ARRC’s recommended conventions for using SOFR in arrears in syndicated business loans, which was published in July.

Derivative Market Announcements

Transition in Sterling Non-Linear Derivatives, Bank of England 

• Now that the ISDA protocol has been published, the regulators are turning their attention to other areas of the derivatives markets.

ARRC Releases Guide and Highlights New ISDA Webinar on USD LIBOR Endgame Developments, ARRC

• ARRC has released a guide that summarizes recent announcements made by U.S. and UK regulators and LIBOR’s administrator for the proposed end for USD LIBOR. Collectively, these announcements call for market participants to stop writing new USD LIBOR contracts by the end of 2021, while allowing most legacy contracts to mature before USD LIBOR stops. The guide also covers what is on the horizon for USD LIBOR’s end as well as the ARRC’s work regarding setting a spread adjustment, the ARRC’s legislative proposal with New York State, and the ARRC’s recommended best practices.
• ARRC Chair Tom Wipf also participated in a webinar (recording and transcript included) about the recent developments and explains what they mean for everyone involved in the transition.