On March 30, 2021, the LMA published its exposure draft RFR documentation as recommended forms, and updated the documentation to reflect, among other things, the Sterling Risk-free Rate Working Group’s (the Working Group) updated conventions. The LMA also replaced their single currency SONIA and SOFR exposure drafts with two recommended form single currency RFR facility agreements, and updated their RFR terms.
On March 25, 2021, the Alternative Reference Rates Committee (ARRC) released supplemental recommendations for its hardwired fallback language for US dollar denominated syndicated and bilateral loans. The ARRC’s supplemental recommendations follow the certainty on fallback timings and economics afforded by the March 5, 2021 announcements by ICE Benchmark Administration, the UK Financial Conduct Authority and ISDA regarding the cessation of LIBOR.
On March 26, 2021, the LMA published a note outlining considerations for market participants relating to the use of forward-looking term SONIA reference rates (Term SONIA Rates).
Term SONIA Rates have been available in beta form since July 2020, and available for use since 11 January 2021. Term SONIA Rates are expected to have limited use as the UK authorities have made clear their preference for the market to adopt a broad-based transition to SONIA compounded in arrears for new transactions, with use of Term SONIA Rates being more limited than the current use of LIBOR, and with SONIA compounded in arrears being seen by the Bank of England and FCA as the most robust and reliable replacement rate for LIBOR. However, it is acknowledged that Term SONIA Rates may provide an option for loan transition for some parts of the loan market.
On March 9, 2021, the Federal Reserve in its Supervision and Regulation Letter (the Letter) provided guidance to Federal Reserve examiners and supervised institutions to assist in assessing progress in preparing for the LIBOR transition.
Specifically, examiners are directed to review the supervised institutions’ “planning for, and progress in, moving away from LIBOR.” Supervised institutions should note that examiners are encouraged to consider taking supervisory action if an institution is not ready to cease issuances of new LIBOR-based contracts by the end of 2021.
March 5, 2021 marks an important day in the LIBOR transition process as the ICE Benchmark Administration (IBA), UK Financial Conduct Authority (FCA) and ISDA made important announcements on the cessation of LIBOR. In recent years the Bank of England and the FCA have made it clear that the lack of an active underlying market makes LIBOR unsustainable and unsuitable for widespread use. As a result, the Bank of England and FCA have worked closely with market participants and other regulatory authorities to ensure alternatives to LIBOR are available and that existing contracts can be transitioned onto these alternatives to safeguard financial stability and market integrity.
With today’s announcements by the IBA, FCA and ISDA, the timeline for the cessation of LIBOR has been fixed.
As the end of Q1 2021 draws closer, the Working Group on Sterling Risk-Free Reference Rates (the Working Group) published a Q&A that aims to address the end-Q1 milestone for no new GBP LIBOR lending and a best practice guide for GBP referencing loans (the Best Practice Guide) on February 26, 2021.
As discussed in our previous blog post (which can be found here), the Working Group recommended that market participants should not initiate new GBP LIBOR referencing loan products expiring post 2021, after the end of Q1 2021. The Q&A has been prepared to highlight considerations that market participants should take into account and addresses important questions in relation to the end-Q1 milestone.
On November 20, 2020, the working group on euro risk-free rates (the Euro Working Group) published two consultations on fallback rates to EURIBOR. Market participants were invited to provide their views on the potential events that could trigger fallback measures and the fallback rates based on the euro short-term rate (€STR) and spread adjustment methodologies. The results of the consultations show that market participants are not in agreement on all matters relating to transitioning from EURIBOR to €STR.
On February 15, 2021, the UK Treasury published a consultation paper on potential legal ‘safe harbor’ rules for legacy LIBOR-referencing contracts which have been amended by the Financial Conduct Authority (the FCA) under the Financial Services Bill.
The U.S. Office of the Comptroller of the Currency published a three-page self-assessment tool for national banks, federal savings associations, and federal branches and agencies of foreign banking organizations to evaluate their preparedness for the expected cessation of LIBOR. The three-page “tool” poses a series of questions for each bank to answer in a self-assessment. According to the agency, these questions can be used to assess:
- the appropriateness of a bank’s LIBOR transition plan;
- bank management’s execution of the bank’s transition plan; and
- related oversight and reporting.
The agency pointed out that LIBOR cessation preparedness assessments “should be risk based,” and tailored to the size and complexity of each bank’s LIBOR exposures. The OCC clearly expects each bank to conduct the self-assessment in accordance with its LIBOR risks, but not all sections or questions will apply depending on the nature and extent of the bank’s LIBOR exposure. For example, the OCC noted that community banks may not offer products that use LIBOR, but “could have exposure in such positions as Federal Home Loan Banks borrowings, mortgage-backed securities, or bonds in the banks’ investment portfolios.”
In announcing the self-assessment tool, the OCC also pointed back to the LIBOR-transition guidance that it and the other banking agencies provided on November 30, 2020. That guidance encouraged banks to transition away from U.S. Dollar LIBOR “as soon as practicable” and, in any event, to “cease entering into new contracts that use USD LIBOR as a reference rate” by December 31, 2021. In light of that guidance, the OCC statement accompanying the “tool” said that “in 2021, LIBOR exposure and risk assessments and cessation preparedness plans should be at least near completion with appropriate management oversight and reporting in place.” Most banks, the agency added, “should be working toward resolving replacement rate issues while communicating with affected customers and third parties, as applicable.”
On February 13, 2021, the European Union’s (EU) amendments to the Benchmarks Regulation (2016/1011) (the Amended BMR) came into force, which provides a legislative fix for the cessation of LIBOR in legacy contracts. The Amended BMR gives the European Commission (the Commission) the power to replace critical benchmarks and other relevant benchmarks if their termination would significantly disrupt or otherwise affect the functioning of the financial markets in the EU.