As the world continues to deal with the COVID-19 pandemic, the end of 2021 deadline for the LIBOR transition has remained unchanged. However, certain deadlines along the way have been extended in recognition of the difficulties that market participants face in these tumultuous times.

In what follows, we explore the current timelines on the path to the transition from LIBOR.

Continue Reading Updated LIBOR Transition Timeline in the COVID-19 Pandemic

On June 30, the ARRC published a revised version of its hardwired fallback language for new US Dollar LIBOR-linked syndicated loans. Along with this updated language, the ARRC also updated its user’s guide, which contains guidance for market participants for the adoption of the refreshed fallback provisions.

Continue Reading ARRC Publishes Updated Recommended Fallback Language for New USD LIBOR-Linked Syndicated Loans

Legaltech News, an American Lawyer Media publication, quoted Chicago partner Clayton Stallbaumer in a June 1, 2020, story about financial institutions leveraging legal and technology expertise to prepare for the coming replacement of the London Interbank Offered Rate (LIBOR) in 2022.

The LIBOR rate is found in hundreds of thousands of financial contracts worth an estimated $220 trillion, Legaltech News reported. That means technology will be vital in helping institutions prepare for the transition to LIBOR’s replacement rate, Stallbaumer said.

“We saw a real opportunity for technology to help our clients transition from LIBOR in an efficient way,” Stallbaumer explained. “The problem they have is it’s a volume and timing issue. We’re roughly 18 months from LIBOR going away, and a lot of our institutional clients have thousands of documents that reference LIBOR. As we were talking to clients about this, there seems to be a real opportunity to use certain types of technology.”

On Thursday, June 4, the Consumer Financial Protection Bureau (“CFPB”) issued guidance to address issues arising out of the pending discontinuation of LIBOR and the resulting need for creditors to transition to other benchmarks. As the CFPB has noted, at this time, the transition is expected after 2021, with the anticipated shift to the Secured Overnight Financing Rate (“SOFR”) index supported by the Alternative Reference Rates Committee (ARRC), a public-private working group organized to address the transition. Ahead of an inevitable, challenging transition, the CFPB issued an extensive rulemaking proposal with request for public comment, a revised consumer handbook, and updated compliance guidance.

Continue Reading CFPB Issues Proposals and Updated Guidance Ahead of LIBOR Discontinuation

In his speech in July 2019, Andrew Bailey called for public debate on potential outcomes for legacy contracts that prove unable to convert or be amended to include fallbacks to risk free rates before the discontinuance of LIBOR. In response to that speech, the Working Group on Sterling Risk-Free Reference Rates last week published a paper on how to catalyse the transition of such ‘tough legacy’ contracts away from LIBOR.

To address ‘tough legacy’ contracts, the Working Group has proposed that the UK Government consider introducing legislation. They note that in the U.S., the Alternative Reference Rates Committee (the ARRC) has proposed a similar approach and there would be benefits from the international consistency that would result from the UK mirroring this.

Continue Reading “Tough Legacy” Contracts May Require Legislative Fix to Catalyse Their Transition Away From LIBOR, Says Working Group

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.

Continue Reading ARRC Announces Key Objectives for 2020

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.

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