LIBOR Transition Advisory Newsletter - November 2020

October saw a large amount of LIBOR transition activity with announcements and milestones across all products. The publication of the ISDA transition protocol was a big step for the derivatives market, but we should note that not all derivatives can be transitioned using the protocol, so there is still more work to be done. In the cash markets, the regulatory milestone to offer RFR-based loans has been passed and the LSTA has issued the draft language for RFR based CLOs. The markets underlying the RFRs haver continued to develop and grow, driven by demand and changes in the market to make RFR the primary quotation rate for interest rate swaps and the change to use RFR for discounting by the clearing houses. Also, regulators have increased their focus on the tough legacy issues. As we head towards the end of 2020, the pieces for the transition are falling in to place but a lot remains as the regulators are adamant about an end of 2021 deadline.

LIBOR Highlights 

General News

FCA Gains New Powers Over Libor Transition, Industry Still Pushed to Actively Migrate to Alternatives, from the Kroll team: Marcus Morton, Florian Nitschke

The FCA has new powers to support the LIBOR transition to address the potential issues of the tough legacy contracts, but the focus on other contracts remains on transitioning to the recommended RFR.

Webinar Replay: LIBOR: Managing the Uncertainty Ahead – Are You Ready?, from the Kroll team: Jennifer Press, Marcus Morton, Mark Turner, Rich Vestuto, Charles Parekh

Our expert panel explores the issues facing companies across all sectors in addressing the end of LIBOR in 2021.

Regulatory Updates

Global Transition Roadmap for LIBOR, FSB

Financial Stability Board (FSB) issues guidance for the transition to the new RFR in 2021, outlining the steps and milestones for a smooth transition.

Term SONIA Reference Rate Publication Summary, Bank of England

In an important development to address some of the potential issues of the tough legacy transition, the Sterling RFR Working Group published a status update on the publication of term SONIA rates.

The FCA and the Bank of England encourage market participants in further switch to SONIA in interest rate swap markets, FCA

The FCA announced that from October 27, the Interdealer swap quotation convention would switch from LIBOR to SONIA, which is likely to provide a boost to volumes and liquidity in the SONIA swap market.

Risk Alert Examination Initiative: LIBOR Transition Preparedness, SEC

In June 2020, the SEC issued a risk alert stating that they assess registrants’ preparedness for the discontinuation of LIBOR. The alert included a sample list of requests for information that OCIE may use in conducting examinations.

FINRA Shares Practices Firms Implemented to Prepare for the LIBOR Phase-out, FINRA

This notice highlights the results of a survey FINRA conducted on firms’ preparedness for the phase-out and the scope of their ongoing efforts to develop and implement programs to address risks relating to the phase-out.

Derivative Market Announcements

Surge in SOFR Derivatives Bodes Well for Shift, Bloomberg 

The rising volumes of SOFR derivatives points to the increasing liquidity underpinning the robustness of the new risk free rates.

A Major Milestone for Benchmark Reform, ISDA 

The publication of the ISDA protocol brings clarity to the transition for a large proportion of the interest rates derivatives market.

Cash Market Details

LIBOR No More: Transition Creates Challenges, CFO

This article provides an outline of the upcoming LIBOR transition and potential avenues of resolution as it relates to loans in particular.

CLOs & LIBOR: Release and Replacement Language, LSTA

The LSTA released its LIBOR Replacement Provisions for Amendment of CLO Indentures to help practitioners amend earlier vintage CLOs with limited or insufficient LIBOR fallback language.

Freddie Mac Completes First Single-Family Credit Risk Transfer Offering Indexed to SOFR, Freddie Mac

On October 13, 2020, Freddie Mac priced its first single family credit risk transfer offering tied to SOFR where they issued over $1 billion in SOFR linked securities. Freddie Mac also began purchasing SOFR linked multifamily loans in October.