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Welcome to our October 2020 issue of the Risk-Free Rates (RFR) Regulatory Round-up - LIBOR Transition. Since our last issue, the main development is that, having received, in effect, a non-objection from the US Department of Justice, on 23 October 2020 ISDA launched the IBOR Fallbacks Supplement to the 2006 ISDA Definitions and the ISDA 2020 IBOR Fallbacks Protocol. The Supplement and Protocol will take effect on 25 January 2021.

The launch of the protocol has been warmly welcomed by the Financial Stability Board (FSB), UK Regulators and Working Group (PDF 203 KB) and the US ARRC (PDF 714 KB). All these organisations have encouraged prompt adherence to the Protocol to assist the transition of derivatives away from LIBOR and help avoid disruption to derivative contracts held by financial and non-financial firms when LIBOR ceases or is considered unrepresentative.

Although the ISDA Protocol is a major step in the LIBOR transition of a significant portion of the derivatives markets, there is still much work to do in other markets. In the last month, regulators and working groups have focused on awareness raising and practical advice on how to transition.

At the global level, the FSB launched on 16 October a global transition roadmap for LIBOR. This includes milestones such as adherence to the ISDA Protocol and:

  • By the end of 2020, firms should be able to offer non-LIBOR linked loans to their customers.
  • By mid-2021, firms should have established formalised plans to amend legacy contracts where this can be done and have implemented the necessary system and process changes to enable transition to robust alternative rates.

These deadlines are more generous than the corresponding deadlines of the UK Working Group on transition.

Sterling market developments

The Sterling RFR Working group (RFRWG) held a webinar on 18 September entitled 'Is your business prepared for LIBOR transition'. The webinar can be watched on YouTube and the RFRWG has since published a summary (PDF 499 KB) of key messages and checklists to help firms prepare for transition, including specific checklists on preparing for lending linked to SONIA and active conversion. The presentation also contains a useful list of links to other resources to give practical help in transitioning.

Other items the RFRWG has published recently to help firms on transition legacy products and system amendments needed for new products, include:

  • Practical guides on active transition of legacy loans (PDF 797 KB) and legacy bond (PDF 437 KB) products 
  • A statement (PDF 492 KB) on credit adjustment spread methodology, which recommends the use of the historical five-year median spread adjustment methodology when calculating the credit adjustment spread, which should then be applied to any relevant SONIA rate
  • A summary (PDF 453 KB) of freely-available independent RFR calculators on the market
  • An overview(PDF 563 KB) of the Beta Term Sonia Reference Rates (TSRR), noting that the RFRWG has recommended the market should adopt SONIA compounded in arrears with the use of TSRR being limited, but also that discussions around removal of the beta tag are expected at end-2020.

In an effort to facilitate a further shift in market liquidity toward SONIA swaps, the FCA and the Bank of England published a statement encouraging 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 initiative was originally planned to take place in March this year but was disrupted by the impact of COVID-19.

As part of the work of the Non-Linear Derivatives Task Force, the RFRWG also published its letter (PDF 359 KB) to ICE Benchmark Administration (IBA), seeking to understand IBA's plans for the GBP LIBOR ICE Swap Rate (ISR) in the event that GBP LIBOR ceases or becomes unrepresentative, or of reduced liquidity in GBP LIBOR swaps prior to these events. The letter proposes use of a 'legacy' GBP LIBOR ISR derived from a SONIA-based methodology but only for legacy trades.

On 21 October, the UK Government took another step in managing the risk of 'tough legacy' LIBOR contracts with the introduction of the Financial Service Bill to Parliament. The Bill amends the UK Benchmarks Regulation (BMR) to allow the FCA to direct a change in the methodology of a critical benchmark (i.e. LIBOR) and extend its publication for a limited time period. The FCA will have discretion to determine specific categories of contracts that will be allowed to use this 'synthetic' LIBOR. Before exercising certain new powers, the FCA will be required to issue policy statements to inform the market about how it intends to operationalise the legal framework set out under the BMR. The Bill will be subject to the usual processes of parliamentary legislative scrutiny, so the timing of its enactment will be subject to parliamentary scheduling.

Euro market developments

The ECB published a summary of responses to its consultation on the publication of compounded rates for €STR. Respondents broadly agreed with proposed calculation methods based on overnight €STR and the proposed day count convention - modified previous business day convention.

In November, the Euro Working Group on RFRs is expected to publish two public consultations on (1) EURIBOR fallback triggers events and (2) EURIBOR fallback rates based on €STR for cash products. The due date for responses will be 8 January 2021.

US dollar market developments

At close of business on 16 October, the clearing houses, CME and LCH, converted discounting and PAI/PAA from EFFR to SOFR on all outstanding cleared USD-denominated swap products. This is expected to encourage the build-up liquidity in SOFR products.

Other market developments

The results of a survey by the Swiss financial markets regulator, FINMA, has found that CHF LIBOR tough legacy volume appears to be small and not an existential issue. The Swiss Working Group on RFRs has stated (PDF 1.2 MB) that a synthetic CHF LIBOR is not expected and is therefore encouraging active transition of all contracts.

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