Welcome to the latest issue of Mayer Brown's IBOR Transition Digest—a periodic compendium of global regulatory and market developments and insights on the complex issues confronting financial market participants as they plan to transition from LIBOR and its variants to replacement benchmark interest rates. As attention to IBORtransition accelerates and becomes more focused, it is critical to have access to comprehensive and timely resources about the market.
For additional resources and an introduction to our global
cross-practice IBOR Transition Task Force, please visit Mayer
Brown's IBOR Transition portal.
Thought Leadership | News and Developments | Upcoming Events
New Rev Proc 2020-44 Provides Limited
Relief for Amending Legacy Contracts to Add IBOR
Fallbacks
Eye on IBOR Transition blog post, 12 October 2020
Revenue Procedure 2020-44 provides retroactive but limited
relief for amending specific types of legacy contracts to add
fallback mechanics for LIBOR or other IBORs, provided such
amendments generally follow select model contract language
recommended by the ARRC and ISDA.
ISDA Board Announces Forthcoming Launch of
Fallbacks Supplement and Protocol
Eye on IBOR Transition blog post, 10 October 2020
ISDA published a statement on October 9 that its IBOR
Fallbacks Supplement and Protocol will launch on October 23, and
the ARRC and Federal Reserve Board issued supporting
statements.
The LSTA Proposes Changes to Trading
Documents for LIBOR Transition
Eye on IBOR Transition blog post, 8 October 2020
The LSTA has commenced the revision of its trading
documentation in order to clarify the applicable interest rate to
be used to calculate delayed settlement compensation on the mixture
of LIBOR- and SOFR-based loans trading in the market.
LSTA Exposes Draft Supplemental Indenture
for Legacy CLOs Without Fallbacks in Order to Facilitate Transition
from LIBOR
Eye on IBOR Transition blog post, 7 October 2020
The LSTA published an exposure draft of operative
provisions and template supplemental indenture for use in
connection with a CLO transaction that does not already contain
provisions to effect the transition from LIBOR to a non-LIBOR
benchmark rate upon the occurrence of specified LIBOR transition
events.
A Credit-Sensitive Supplement to SOFR:
Borrowers' Objections
Eye on IBOR Transition blog post, 5 October 2020
While some banks believe that the interest rate on
SOFR-priced loans should be subject to increase by an additional
spread that would reflect credit risk at a particular time,
borrowers have pointed out some of the problems that they see with
a credit-sensitive supplement to SOFR.
TAR Tools Have Some Explaining to
Do
Eye on IBOR Transition blog post, 2 October 2020
Traditional technology-assisted review tools can be
leveraged to help businesses with their LIBOR transition
projects.
ISDA Raises Starter Pistol on IBOR
Transition Race
Eye on IBOR Transition blog post, 30 September 2020
On September 23, ISDA's CEO provided an updated
timetable of the remaining steps to publication and effectiveness
of the ISDA IBOR Fallbacks Supplement and IBOR Fallbacks
Protocol.
SOFR Starter Kit Tools that Should be
Adopted Immediately
Eye on IBOR Transition blog post, 25 September 2020
The ARRC's SOFR Starter Kit brings together the
numerous resources that the ARRC has published to implement its key
recommendations, including links to its Best Practices, syndicated
loan conventions, refreshed recommended business loans fallback
language, and an internal systems transition guide.
Singapore Leads LIBOR Transition in
Asia
Eye on IBOR Transition blog post, 25 September 2020
Discussing recent IBOR transition developments in
Singapore and notable RFR-based deals in Asia.
Proposal for a Governmental IBOR
Transition in the European Union
Eye on IBOR Transition blog post, 25 September 2020
The European Commission has proposed an amendment to the
EU Benchmark Regulation to enable supervising authorities to amend
certain financial instruments or contracts by way of a directly
applicable regulation, if necessary to achieve a benchmark
transition without substantial market deterioration and litigation
risks.
Three LIBOR Transition Considerations for
Syndicate Lenders
Eye on IBOR Transition blog post, 24 September 2020
One of the most ubiquitous aspects to
LIBOR-transition-related fallback provisions under the ARRC's
recommended amendment approach for syndicated loans is limiting or
removing syndicate members' consent rights to the replacement
rate. We list some LIBOR-transition-related issues that syndicate
members should consider before making a commitment to lend.
Depository-Institutions Repo Rate –
China's Response to LIBOR Transition
Eye on IBOR Transition blog post, 24 September 2020
The People's Bank of China released a white paper on
August 31, expressing its intention to adopt the
Depository-Institutions Repo Rate as the alternative substitute
rate in the Chinese banking market.
Documenting LIBOR Transition in the Loan
Markets: The LMA Offers New Solutions, But Others Likely Will
Follow
Eye on IBOR Transition blog post, 24 September 2020
On 11 September 2020, the LMA added to their complement of
exposure drafts by publishing a draft multicurrency term and
revolving facilities agreement incorporating rate switch
provisions. This came on the heels of a note issued by the
LMA setting out optional supplementary language to be added to its
existing Revised Replacement of Screen Rate Clause.
An Update on Interest Rate Conventions in
the SONIA-Linked Floating Rate Note Markets
Eye on IBOR Transition blog post, 24 September 2020
Discussing the lookback, weighting, and observation shift
conventions being adopted in the SONIA-linked floating rate note
market.
United States – Derivatives
ARRC Supports Forthcoming ISDA IBOR
Fallbacks Protocol and Encourages Adherence
ARRC, 9 October 2020
"It is essential that market participants be prepared
to adhere to the Protocol to help address both individual firm
risks and systemic risks associated with the discontinuation of
LIBOR."
Federal Reserve Board Supervision and
Regulation Letter SR 20-22: ISDA IBOR Fallback Protocol and IBOR
Fallback Supplement
Federal Reserve, 9 October 2020
The Federal Reserve stated that it strongly supports the
transition away from LIBOR and expects supervised institutions to
manage the risks associated with this transition in a manner
commensurate with their size and risk profile.
Business Review Letter 20-8 re DOJ
enforcement intentions in connections with ISDA's amendment of
standardized documentation to account for IBOR
cessation
U.S. Department of Justice, 1 October 2020
"Based on our investigation and ISDA's
representations regarding its proposal to amend its standardized
documentation to include the Proposed Supplement and Proposed
Protocol, the Department has concluded that ISDA's proposal is
unlikely to produce anticompetitive effects, and ISDA's
proposal has the potential to offer substantial benefits to the
financial services industry. Accordingly, the Department has no
present intention to challenge ISDA's proposal to amend its
standardized documentation."
United States – General
Revenue Procedure 2020-44
U.S. Internal Revenue Service, 9 October
2020
On October 9, the US Internal Revenue Service released
Revenue Procedure 2020-44, providing retroactive but limited relief
for amending specific types of legacy contracts to add fallback
mechanics for LIBOR or other IBORs.
Frequently Asked Questions Regarding the
RFP for the Administration of Recommended Spread Adjustments and
Spread-Adjusted SOFR Rates to Facilitate Contractual
Fallbacks
ARRC, 9 October 2020
The ARRC addresses technical questions relating to the
September 2 request for proposal.
Frequently Asked Questions Regarding the
ARRC's Request for Proposals for the Publication of
Forward-Looking Term SOFR Rates
ARRC, 7 October 2020
The ARRC addresses technical questions relating to the
September 10 request for proposal.
The LIBOR Countdown Has Not
Stopped - speech by EVP and General Counsel,
Michael Held
NY Fed, 29 September 2020
"What is most important is that you move off of LIBOR
and do it now."
Transitioning Away from LIBOR:
Understanding SOFR's Strengths and Considering the Path
Forward – speech of SVP, Nathaniel
Wuerffel
NY Fed, 18 September 2020
Reviewing the reasons for transition away from LIBOR and
for the choice of SOFR as a replacement, and discussing the
transition challenges for commercial loan products.
United Kingdom – Derivatives
The FCA and the Bank of England encourage
market participants in further switch to SONIA in interest rate
swap markets
FCA/BOE, 28 September 2020
Following close engagement with market participants, the
FCA and Bank of England support and encourage liquidity providers
in the sterling swaps market to adopt new quoting conventions for
inter-dealer trading based on SONIA instead of LIBOR from 27
October this year.
UK – General
From LIBOR to SONIA: a bridge to the
future – speech by Executive Director,
Andrew Hauser
BOE, 21 September 2020
Delivering three key messages: "LIBOR transition
affects every company that borrows in sterling; there is time if
you start now; and for those needing to transition, there is help,
and lots of it."
Europe – General
Summary of responses to the ECB's
public consultation on the publication of compounded term rates
using the €STR
ECB, 7 October 2020
Main takeaways include broad agreement with the proposed
methodology for calculating compounded rates and index values, the
proposed day-count convention, the selection of maturities, and ECB
as the proposed publisher of compounded term rates.
ECB publishes statement of compliance of
€STR with IOSCO Principles for Financial
Benchmarks
ECB, 30 September 2020
The European Central Bank has published a statement of
compliance with the Principles for Financial Benchmarks developed
by the International Organization of Securities Commissions,
describing how the ECB complies with these principles, and
therefore with international best practice, in its administration
of the €STR.
Executive Summary of 29 September 2020
Working Group Meeting
SNB, 30 September 2020
Topics discussed include adherence to ISDA's IBOR
Fallbacks Protocol, the volume of SARON-based cash products, loan
convention recommendations, fallback language, and the handling of
legacy trades.
2021: A Defining Moment for The Interest
Rates Reform – speech by Chair, Steven
Maijoor
ESMA, 21 September 2020
"Only coordinated efforts by both the public and the
private sectors will make the interest rates reform a global
success story. The extensive work already delivered in many
jurisdictions across the globe has laid foundations for a
successful interest rates reform."
Global – Derivatives
ISDA Board Statement on the IBOR Fallbacks
Supplement and Protocol
ISDA, 9 October 2020
"ISDA will launch the IBOR Fallbacks Supplement to
the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol
on October 23, 2020. The supplement and the amendments made by the
protocol will take effect on January 25, 2021."
RFR Conventions and IBOR Fallbacks –
Product Table
ISDA, 28 September 2020
The product table sets out how the fallbacks in ISDA's
amended standard documentation would function for various different
products, including certain non-linear products. The chart
also sets out a comparison of the standard conventions for the same
products that reference IBORs and the standard and/or expected
conventions for such products that reference RFRs as of the date of
the document.
Updating the Fallbacks
Timetable
ISDA, 23 September 2020
Describing the expected timetable for publishing the ISDA
IBOR Fallbacks Supplement and IBOR Fallbacks Protocol., which is
expected to take effect in mid- to late-January 2021.
ISDA Quarterly – Asian
Options
ISDA, 3 September 2020
Exploring the progress firms in the Asia-Pacific region
have made on LIBOR transition, as well as efforts to build
liquidity in alternatives to local interbank offered rates. As big
users of LIBOR, Asian institutions have large legacy exposures and
"prompt action is needed now to deal with them."
Global – General
BIS Working Paper No 891 - At the
crossroads in the transition away from LIBOR: from overnight to
term rates
Bank for International Settlements, 8 October 2020
Evaluating how new ?oating-rate loans can be based on
risk-free overnight rates, the chosen successors to LIBOR and ways
to minimize basis risk, and concluding that the ideal option to
reduce basis risk is to use a shortened observation period when
computing term rates based on past overnight rates.
Interest Rate Benchmark Reform–Part
2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4, and IFRS
16
IFRS, 27 August 2020
The Phase 2 amendments—the final set—address
issues that might affect financial reporting during the reform of
an interest rate benchmark, including the effects of changes to
contractual cash flows or hedging relationships arising from the
replacement of an interest rate benchmark with an alternative
benchmark rate.
IFRS Taxonomy 2020: Interest Rate
Benchmark Reform-Phase 2
IFRS, 27 August 2020
To reflect the Phase 2 amended disclosure requirements,
which added new disclosure requirements, the International
Accounting Standards Board proposes to add four elements and one
table to the IFRS Taxonomy, and has issued this consultation to
seek market feedback on the proposed changes.
The ISDA Fallback Protocol
IBOR Transition Webinar Series, 22 and 23 October
2020
Europe: 22 October, 2020 - 5:00 p.m. to 5:30 p.m GMT and 23 October, 2020 - 4:00 p.m. to 4:30 p.m. GMT
United States: 22 October, 2020 - 12:00 p.m. to 12:30 p.m EDT and 23 October, 2020 - 11:00 a.m. to 11:30 a.m. EDT
Join Mayer Brown Partners Ed Parker, Chris Arnold and Curtis Doty for a discussion of the key features of the ISDA IBOR Fallbacks Protocol and its underlying document template, as well as related issues, including adherence to the protocol and key timing milestones. In the second part of the webinar we will focus on a critical analysis of the Protocol and answer questions relating to the key implications for loan markets and the likely adherents to the protocol.
Replays of all of our IBOR Transition Webinar Series presentations are available via iTunes podcasts, Google play or Spotify, as well as on the IBOR Transition Webinar Series page of our dedicated IBOR Transition portal.
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.