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.

Continue Reading Replacement of LIBOR: IS Litigation Inevitable in the Derivatives Market?

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.


ARRC press release relating to its legislative proposal

ARRC draft legislative proposal text and related commentary and case studies

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.

Continue Reading Federal Reserve Bank of New York Announces Publication of SOFR Averages and Index

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.

Update: The Bank of England has delayed the introduction of increased haircuts to apply to all LIBOR linked collateral. For more details, please refer to our July 28 post.

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
SOFR $222.9 billion 998
SONIA $7.1 trillion 6,304
€STR $0.9 billion 16
SARON $4.2 billion 9
TONAR $76.3 billion 178

Continue Reading Recent Commentary from the UK Financial Conduct Authority (FCA) and Bank of England

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.

Following the selection of alternative risk-free rates (RFRs) to replace each of the five LIBOR currencies: SOFR (for USD LIBOR), SONIA (for GBP LIBOR), SARON (for CHF LIBOR), TONAR (for JPY LIBOR) and €STR (for Euro LIBOR), ISDA launched consultations to obtain input from market participants on how to address the adjustments required as a result of the economic and term differences between LIBOR and RFRs. In November 2019 and February 2020, ISDA published the results of these consultations. ISDA established that the majority of respondents preferred:

  • A spread adjustment based on the ‘historical median approach over a five-year lookback period’ to address the economic differences between IBORs and RFRs;
  • A ‘compounded rate set in arrears’ to address differences in tenor; and
  • Not to include a transitional period in the spread adjustment calculation.

On February 24, 2020 ISDA launched a re-consultation on pre-cessation fallbacks following comments from the UK Financial Conduct Authority and ICE Benchmark Administration (the administrator for LIBOR) on the period that LIBOR may continue to be published following a regulatory statement that the benchmark is no longer representative of the underlying market. The deadline for responses to this consultation is March 25, 2020.

Additional resources:

ISDA’s November 2019 report

ISDA’s February 2020 report

ISDA’s re-consultation on pre-cessation fallbacks

In a letter to the International Swaps and Derivatives Association (ISDA) on January 20, 2020, the Financial Conduct Authority (FCA) confirmed the possibility that LIBOR may continue to be published for a short period after regulators have announced that it is no longer representative of an underlying market (a non-representative LIBOR). The European Benchmarks Regulation could prohibit EU-supervised firms from entering into new derivatives transactions referencing such a non-representative LIBOR. As a result, the FCA encouraged ISDA to provide the derivatives market with the ability to insert triggers into their derivatives contracts to allow fallbacks to risk-free rates if such a regulatory announcement is made prior to the cessation of LIBOR (a pre-cessation trigger).

Continue Reading ISDA to Revisit LIBOR Pre-Cessation Triggers

Potential New York State Legislation

The AARC has proposed a potential legislative solution aimed to reduce the adverse economic outcomes of legacy LIBOR fallbacks in contracts governed under New York law for all asset classes. (New York law is the chosen governing law for many financial agreements that use LIBOR as a reference.)  Such legislative solutions proposals were discussed at certain AARC meetings in 2019, but the proposal took more detailed form recently.  On March 6, 2020, the ARRC proposed legislation that would apply the ARRC-recommended benchmark replacement (SOFR) on both a mandatory and statutory basis, and contained provisions designed to limit litigation arising from the benchmark replacement.

Continue Reading Possible Legislative Solutions for Existing US LIBOR Products