LIBOR Transition Advisory Newsletter - October 2021

This month the FCA announced that the synthetic LIBOR rates to be available for Sterling and Yen after December 31, 2021 would be available for a much wider range of products than previously expected, prompting a sigh of relief from many LIBOR users still grappling with the transition. Only cleared derivatives will not be allowed to use the computed rates which will allow some of the legacy book to expire without transitioning as well as more time for the contracts that need to be amended. However new issuance in LIBOR will not be permitted so firms will still need to ensure that their infrastructure can handle the new Risk Free Rates (RFRs) and we would expect that the scope of the synthetic indices will narrow over time.

In the US SOFR has seen a pick-up in adoption as well as progress in the SOFR first program, cementing its status as the preferred replacement for USD LIBOR.

As we enter the fourth and final quarter of LIBOR as we know it, the clock is still ticking down and the regulators keep the pressure on to execute the transition while at the same time provide mechanisms to ensure that it happens in an orderly fashion.

LIBOR Highlights

General News

A U.S. Companies Pick Up Adoption of Libor Alternative SOFR, Wall Street Journal

• SOFR is reinforcing its position as the preferred replacement rate for USD LIBOR with an increase in adoption as well as increased liquidity in markets based on the RFR.

Market Details

Market Participants Must Act Now as US Libor Ends, The Banker

• Tom Wipf, chair of the ARRC, pleads with market participants to act now and focus on three priorities: Use SOFR for new issuance; use fallback language developed by ARRC for existing contracts; and support the US federal legislation designed to address tough legacy contracts.

CLO's Near-Record Run Risks Faltering on Libor Transition Chaos, Bloomberg

• A record year for CLO issuance is expected to be followed by a slow start to 2022 as market participants adjust to the world post LIBOR. The transition away from LIBOR makes the issuance of CLOs more complex as it increases the likelihood of a mismatch between CLO’s assets and whatever benchmark its liabilities use.

Regulatory Updates

Benchmark Strategies Forum: Scott O’Malia Opening Remarks, ISDA

• ISDA CEO, Scott O’Malia, sets out the agenda for LIBOR’s final quarter and emphasizes there is still much to be done.

Further Arrangements for the Orderly Wind-down of LIBOR at end-2021, FCA

• FCA launches consultation on the use of Synthetic LIBOR rates for GBP and Yen allowing their use for a much wider range of products than expected which should be a great help for firms still working on the transition.

Across-the-Curve Credit Spread Indexes (AXI), SOFR Academy

• Launch of a credit spread index to be used in conjunction with SOFR to address one of the hurdles in moving from LIBOR to an RFR.

Poland Presses EU for Quick Fix to Expiring Franc Libor Rates, Bloomberg

• The Polish financial system could face “significant disruptions” unless a smooth transition from the franc LIBOR rate is ensured.