On October 23, 2020, ISDA published its long-awaited IBOR Fallbacks Supplement to the 2006 ISDA Definitions (the Supplement) and Protocol. The publication is a result of years of consultations with regulators and market participants and seeks to provide a solution for the trillions of dollars of IBOR-referencing derivatives contracts. The Supplement and Protocol provide a standardised and efficient means of transitioning derivatives contracts currently referencing IBORs to risk-free rates. At present, uptake and market acceptance of these changes has been resounding, as over 700 parties have adhered to the Protocol less than four weeks after its launch.
On October 21, 2020, the UK Government introduced the Financial Services Bill (the Bill) to Parliament. The Bill is seen as a vital step towards ensuring the UK’s continued status as a global finance hub in the post-Brexit world, and it also introduces the UK Government’s legislative fix for LIBOR-referencing contracts that face insurmountable barriers in the transition from LIBOR (“tough legacy contracts”), as announced in June and discussed in our earlier update.
Following the DOJ’s favourable business review letter published on October 1, 2020 (as discussed in our earlier blog post), on October 9, 2020 ISDA released a statement from its Board of Directors in relation to the IBOR Fallbacks Supplement and Protocol. In it, they state that they have kept the Australian, Canadian, EU and other competition authorities fully informed of the issues covered in the DOJ’s letter, and that they do not anticipate any adverse action by these authorities in relation to the implementation of the new fallbacks.
As such, ISDA have announced that they will launch the IBOR Fallbacks Supplement and Protocol on October 23, 2020. The Supplement, and the amendments made by the Protocol, will then take effect from January 25, 2021. On this date, all new derivatives contracts incorporating the 2006 ISDA definitions and one of the covered IBORs will contain the new fallbacks, and legacy derivatives contracts will incorporate the new fallbacks if both counterparties adhere to the Protocol (or otherwise bilaterally agree the incorporation of the new fallbacks into their contracts).
Please contact any of the authors of this article or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.
On October 1, 2020, the U.S. Department of Justice’s (DOJ) Antitrust Division announced that it had completed its review of ISDA’s proposed amendments to its standard documentation to deal with IBOR discontinuation (by way of a Protocol and Supplement). The DOJ concluded that ISDA’s proposals do not harm competition, and so announced that they will not challenge them. A copy of the letter can be found here.
In a statement made on September 29, 2020, the Financial Conduct Authority (FCA) and Bank of England endorsed a proposal by the Working Group on Sterling Risk-Free Reference Rates (the Working Group) that the interdealer quoting convention should change such that prices be linked to SONIA, rather than LIBOR. This change was originally to be implemented from March 2, 2020, but has been delayed due to the COVID-19 pandemic.
As we approach the ARRC’s September 30, 2020 deadline for new issue
syndicated loans to include the ARRC’s recommended hardwired fallback
language, several market sources report that a borrower has included the
language in an amendment to its term loan and revolving facilities
documentation in what appears to be the first example of the language’s
adoption in a syndicated loan. Continue Reading ARRC Hardwired Fallback Language’s First Adoption in a Syndicated Institutional Loan
ISDA had intended to publish a supplement to the 2006 ISDA Definitions such that new transactions incorporating them would include fallbacks for LIBOR cessation (the Supplement), and a protocol to facilitate amendments to legacy derivate contracts (the Protocol) (for more information, see our earlier blog post). ISDA initially expected publication of the supplement and protocol to occur in the coming months. However, on September 21, 2020 they published a letter in which the Protocol and Supplement timeline was updated.
In an important step for the syndicated loan market in transitioning to SOFR and away from LIBOR as a benchmark interest rate, the Loan Syndications and Trading Association (“LSTA”) recently published what it deems a “concept” credit agreement (we’ll call it the “Concept SOFR Agreement” here) that references daily simple SOFR or daily compounded SOFR. The Concept SOFR Agreement can be found on the LSTA’s website, along with a blackline against the LSTA’s form term loan agreement referencing LIBOR (available to LSTA members at www.lsta.org).
On August 19, 2020, the ARRC updated its recommended Best Practices for the LIBOR transition in anticipation of the imminent publication of ISDA’s IBOR Fallback Protocol (the “Protocol”) (which we discussed in our earlier blog post, available here).
These updates follow the July 22, 2020 letter from ISDA (the “Letter”) (available here), in which ISDA confirmed that market participants will be able to sign up to the Protocol “in escrow”. This will consist of a two-week pre-publication period in which firms can sign up in order to adhere to the Protocol as promptly as possible. It is expected that this escrow period will begin soon, though no hard date has yet been set.
In light of the Letter, the ARRC’s Best Practices have been updated to include a specific recommendation to “[d]ealers and other firms with significant derivatives exposures” to sign up to the Protocol during the escrow period to promote adoption as quickly as possible. The Best Practices have also been updated to recommend that other market participants adhere to the Protocol “within the 3 to 4 month period after it is published and before the amendments to embed the fallbacks in legacy transactions take effect.”
As such, it is important that market participants, especially those with significant derivatives exposures, consider adhering to the Protocol “in escrow” in order to navigate the transition of their legacy derivatives as smoothly and efficiently as possible. Please contact any of the authors of this article or your regular McGuireWoods contact if you have questions about, or would like assistance with, the LIBOR transition.
It’s been a busy summer in the land of LIBOR transition preparation. As part of the ARRC’s ongoing efforts to prepare the cash product markets for the transition to SOFR and away from LIBOR as a benchmark interest rate, it posted ten separate releases between Memorial Day and August 7, 2020, in addition to hosting six “SOFR Summer Series” panel discussions on various SOFR topics (which were recorded and can be accessed here). This blogpost focuses on aspects of the ARRC’s releases relating to business loans.
Read on for more details, but here are a few major takeaways: (1) don’t expect any COVID related delays in the LIBOR sunset schedule – work on implementing hardwired LIBOR fallback language this fall and plan stop using LIBOR by mid-2021; (2) the ARRC now recommends simple SOFR in arrears as the best available fallback rate alternative for most business loans (at least until a term SOFR in advance market develops); and (3) feedback from the business loan market reflects a preference for following ISDA’s lead on LIBOR to SOFR transition issues whenever practicable to facilitate consistency between swaps and business loans (e.g., spread adjustments and certain conventions).