LIBOR Transition Advisory Newsletter - September 2021

August saw little let up in the efforts to move the LIBOR transition forward. There was significant progress in the other IBOR rates apart from USD and GBP as well as further progress in the introduction of term SOFR rates in the U.S. as well as continued growth in the RFR derivatives markets.

As the holiday season comes to an end, the Q4 milestones are not far away, and we are entering the last big push toward the year-end deadlines.

LIBOR Highlights

General News

ARRC Best Practice Recommendations Related to Scope of Use of the Term Rate, ARRC

• This document lays out the ARRC’s recommended best practices for the use of the SOFR Term Rate in contracts. The recommendations are intended to be in line with the principles set out by the ARRC, that the use of the SOFR Term Rate should be in proportion to the depth of transactions in the underlying derivatives market. They should not materially detract from volumes in the underlying SOFR-linked derivatives transactions that are relied upon to construct the SOFR Term Rate itself over time and as the market evolves.

Frequently Asked Questions on Best Practice Recommendations Related to Scope of Use of the Term Rate, ARRC

• Prior to the ARRC’s formal recommendation of the CME Group’s forward-looking SOFR Term Rates (“the SOFR Term Rate”), the ARRC laid out its best practice recommendations on the scope of use of the SOFR Term Rate in contracts. The attached link seeks to answer the most frequently asked questions regarding best practices.

Cboe Launches Ameribor Futures as Libor Transition Continues, The Trade

• Cboe Futures Exchange will launch futures on the Ameribor Term-30 interest rate benchmark in September, subject to regulatory approval.

Market Details

ARRC Welcomes Launch of Refinitiv’s USD IBOR Cash Fallbacks Prototype, ARRC

• On August 11, 2021, ARRC welcomes Refinitiv’s prototype publication launch 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.

ISDA Responds to FCA on LIBOR Transition and the DTO, ISDA

• On August 25, 2021, ISDA submitted a response to the FCA’s CP21/22 on LIBOR transition and the derivatives trading obligation (DTO). Currently, the classes of derivatives that are subject to the DTO are swaps referencing U.S. dollar LIBOR, sterling LIBOR, EURIBOR and certain credit default swaps. The FCA is modifying the DTO in light of interest rate benchmark reform and the transition from LIBOR to risk-free rates.

SOFR Gains but Still Has Far to Go as LIBOR Replacement, CFO DIVE

• The availability of a forward-looking term rate for the Fed’s preferred LIBOR replacement will boost acceptance, but the LIBOR phase-out still has far to go.

Regulatory Updates

LIBOR Transition - Update From Hong Kong, Lexology

On August 19, 2021, HKMA issued a Circular to all authorized institutions providing updates on the interest rate benchmarks reform. Three key takeaways form the Circular:

• HKMA follows the formal recommendation by the U.S. ARRC to replace LIBOR with the forward-looking SOFR term rates as the preferred ARR.
• HKMA formally postpones the restriction requiring authorized institutions (AIs) to cease to issue any LIBOR-linked products from June 30, 2021 to the end of 2021 (the "Deadline"). This gives market participants around four months more from now to decide on their response to the reform.
• To monitor AIs' transition away from LIBOR, HKMA will conduct its "Survey on Reform of Interest Rate Benchmarks" more frequently.

Libor Shift Quickens in Singapore as Contracts Jump Fourfold, Yahoo Finance

• Banks in Singapore are embracing a new benchmark for derivatives transactions as the city state prepares to transition away from LIBOR by the end of September 2021.

Treasury, Agencies Urge Financial Institutions to Offer USD Libor Alternatives, ABA Banking Journal

• In a letter to non-financial corporations on August 23, 2021, the heads of the Treasury Department, Federal Reserve, SEC and Commodity Futures Trading Commission addressed the ongoing LIBOR transition, noting that “a smooth transition will be best supported if financial institutions offer alternatives to USD LIBOR that meet borrower needs and if this is done in a timely fashion.”