On April 17, the ARRC released a set of key objectives for 2020 that the ARRC has set for itself to support the voluntary use of SOFR as an alternative to USD LIBOR. The ARRC stated that its objectives were developed keeping in mind the current expectation that LIBOR can no longer be guaranteed beyond the end of 2021, noting that this timeline was recently reinforced by the UK FCA in a statement released in the context of dislocations surrounding the coronavirus.
On April 17, the ARRC released a webinar providing an in-depth overview of the ARRC’s proposed New York State legislation.
As previously noted on this blog, the ARRC has indicated that the proposed legislation is intended to minimize legal uncertainty and adverse economic impacts associated with LIBOR transition and would: (i) prohibit a contract party from refusing to perform its contractual obligations or declaring a breach of contract as a result of LIBOR discontinuance or the use of the legislation’s recommended benchmark replacement, (ii) establish that the recommended benchmark replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR, and (iii) provide a safe harbor from litigation for the use of the recommended benchmark replacement.
The ARRC’s webinar relating to the proposed New York State legislation is available here.
On April 8, the ARRC announced that it had agreed on a recommended spread adjustment methodology for cash products referencing USD LIBOR.
The ARRC’s recommended methodology is intended for use in for USD LIBOR contracts that have incorporated the ARRC’s recommended hardwired fallback language or for legacy USD LIBOR contracts where a spread-adjusted SOFR can be selected as a fallback. According to the ARRC, the recommended methodology is intended to make the ARRC’s recommended spread-adjusted version of SOFR more comparable to USD LIBOR and consistent with ISDA’s fallbacks for derivatives markets. Except to the extent required by the terms of parties’ contracts, use of the ARRC’s recommended methodology is voluntary.
The ARRC has recommended a spread adjustment methodology based on a historical median over a five-year lookback period calculating the difference between USD LIBOR and SOFR, consistent with the methodology recommended by ISDA for derivatives.
For consumer products only, the ARRC has recommended a 1-year transition period to this five-year median spread adjustment methodology.
The full text of the ARRC’s announcement is available here.
In our blog post of February 11, 2020, we discussed ISDA’s re-consultation on pre-cessation triggers following the announcement by the Financial Conduct Authority that there is a possibility that LIBOR may continue to be published for a short period after regulators have announced that it is no longer representative of the underlying market (a non-representative LIBOR).
ISDA announced the preliminary results of this re-consultation on April 15, 2020. The initial results indicate that a significant majority of respondents are in favour of including both pre-cessation and permanent cessation triggers in the amended 2006 ISDA Definitions and in a single protocol for including the updated definitions in legacy trades.
It should be noted that the results are preliminary and subject to further analysis but it is unlikely that they will change. ISDA, therefore, expects that the amended 2006 ISDA Definitions will include pre-cessation triggers following a ‘non-representativeness’ determination and permanent cessation triggers for all derivatives contracts referencing LIBOR that incorporate the amended 2006 ISDA Definitions.
Watch for further McGuireWoods client alerts as ISDA expects to publish a final report analysing the consultation results in the coming weeks, along with information on their next steps. For more information, please contact the McGuireWoods London debt finance team.
With the announcement by the Financial Conduct Authority that the London Interbank Offered Rate (LIBOR) may cease to exist, the financial markets are facing a major upheaval in this respect. Market participants, financial institutions and lawyers alike are working around the clock to ensure the transition from LIBOR to risk-free rates (RFRs) is as seamless as possible.
On March 6, 2020, the ARRC released a proposal for New York State Legislation, which the ARRC states is intended to minimize legal uncertainty and adverse economic impacts associated with LIBOR transition.
According to the ARRC, the proposed legislation would: (i) prohibit a contract party from refusing to perform its contractual obligations or declaring a breach of contract as a result of LIBOR discontinuance or the use of the legislation’s recommended benchmark replacement, (ii) establish that the recommended benchmark replacement is a commercially reasonable substitute for and a commercially substantial equivalent to LIBOR, and (iii) provide a safe harbor from litigation for the use of the recommended benchmark replacement.
The proposed legislation would not override existing contract language that specifies a non-LIBOR based rate as a fallback to LIBOR(e.g., the Prime rate).
The ARRC indicated that, in the coming weeks, it plans to host a webinar to provide an in-depth overview of the proposed legislation, with details relating to the webinar to be published separately on the ARRC’s website.
On March 2, 2020, the Federal Reserve Bank of New York (the “New York Fed”), as administrator of SOFR, began publishing 30-, 90-, and 180-day SOFR Averages as well as a SOFR Index.
The SOFR Averages for a given publication date incorporate all the SOFR values starting exactly 30-, 90-, and 180-calendar days before the publication date, regardless of whether or not that date is a weekend or holiday, and extend through the SOFR published that day.
On February 26, 2020, the LSTA released a revised draft to its Compounded SOFR in Arrears “concept credit agreement”, which was initially released on October 1, 2019 (see a brief summary of the initial concept credit agreement). In addition to bringing the concept credit agreement current with other LSTA form changes, the update addresses comments received from market participants on the initial draft:
- makes some adjustments to the “Compounded SOFR” definition to reflect comments from the ARRC in its SOFR Index release (see a brief summary of the ARRC’s SOFR Averages and Index release);
- adds language to address the possibility for a transition to a forward-looking Term SOFR Rate (which doesn’t currently exist but could be established in the future);
- adds the 30-day Average SOFR (as noted above, now being published by the New York Federal Reserve) as a base rate option to the definition of “ABR”;
- calls out some potential timing issues with the lookback with observation shift that should be considered, in the footnote to the “Observation Period”;
- adds a new “Compensation for Losses” provision to address possible losses associated with intra-period prepayments.
Market participants continue to offer comments to the LSTA on how to address the adoption of SOFR as an index rate in credit agreements, and we will continue to track the evolution of SOFR based contract provisions in the McGuireWoods’ LIBOR Transition Blog.
The FCA and the Bank of England (BoE) have encouraged market participants to switch from LIBOR to SONIA from March 2, 2020 in all new trades. Some market participants have already started referencing RFRs. For the year to date ending on March 6, 2020 the following notionals* (as published by ISDA) were traded.
|RFR||Traded Notional||Trade Count|
The LMA continues to encourage market participants to replace IBORs with RFRs as a reference rate in all contracts and make all necessary adjustments for using the RFRs as the standard benchmark. The LMA published exposure drafts of compounded SONIA and SOFR facilities agreements to enable market participants to consider certain structural issues related to the use of SONIA and SOFR in loan documentation. Once consensus is reached on certain issues, the LMA will publish these exposure drafts as recommended form documentation.
To the extent IBORs are still referenced in loan documentation, the LMA recommends that its standard ‘Replacement of Screen Rate’ clause be included in loan documentation. In December 2019, the Working Group on Sterling Risk-Free Reference Rates published a consultation on credit spread adjustment methodologies for fallbacks in cash products (including loan and debt capital market products) referencing GBP LIBOR. The consultation was open until February 6, 2020 and we expect the results to be published shortly.