Welcome to the latest RFR Regulatory Round up. The priorities for member firms’ clients for 2019 have begun to crystallise and include strategy definition and refinement; client outreach planning; and contracts impact assessment and planning. There have been a number of key regulatory updates over the last couple of months that will help to further drive clients' priorities.
Below you will find the latest regulatory summary of activities and output from key parties including: ECB, BOE and ARRC.
Working Group on Euro Risk Free Rates - updates on EONIA - €STR transition.
Sterling RFR working group - 2019 priorities for LIBOR to SONIA transition.
Alternative reference rate committee - Information on Open Office Hours and SOFR PAI discounting.
ISDA - timelines for implementation of fallbacks.
Accounting - IFRS Staff paper and Sterling RFR letter to the IASB.
Working Group on Euro Risk Free Rates
EONIA - €STR transition
On 14 March 2019, the Working Group on Euro Risk Free Rates recommended that firms gradually replace EONIA with €STR as a reference rate for all products and contracts. The ECB will start publishing €STR from 2 October 2019 and will calculate a one-off spread between €STR and EONIA. It is anticipated that the EONIA methodology will be amended to €STR plus a spread to aid the transition from €STR to EONIA. Firms will need to prepare for this key event in 2019, in particular this will include the publication of EONIA changing from T0 to T+1 to reflect the updated methodology.
Sterling RFR working group
February Working group minutes - 2019 priorities
The Bank of England has recently published the minutes of the February Working Group on Sterling Risk Free Rates. The minutes identified the five priorities for 2019: Term SONIA reference rates; Critical infrastructure; Key enabling building blocks; communication and awareness; Cross-jurisdictional co-ordination. These priorities indicate that 2019 will be an important year in the RFR transition for regulators, industry bodies and firms. As the key infrastructure, industry protocols and building blocks emerge, the pressure for firms to act and kick-start their transition will grow. In particular, firms need to consider their strategy for internal and external communications for the transition to ensure staff and clients are ready.
Alternative Reference Rates Committee
Open Office Hours
The ARRC has announced (PDF 541 KB) that it will hold weekly open office hours on Friday afternoons. The office hours are in the form of a conference call to answer questions about the LIBOR transition from market participants. Market participants are required to submit their questions in advance to the ARRC Secretariat. These sessions are a good opportunity for firms to flag items of concern and obtain key insights which could help their transition.
SOFR PAI discounting
The ARRC has published (PDF 372 KB) the meeting minutes from the 28th February meeting. One of the key updates was LCH's announcement that by the end of 2020 it would adopt SOFR PAI discounting for both new and legacy trades. LCH intends to offer a method for compensating for any valuation impact associated with the move. The move to SOFR PAI discounting is a key step in the ARRC Paced Transition Plan. This move provides additional impetus for firms to ramp up their transition programmes to ensure they are ready for this change at the end of 2020.
Timeline for implementation of fallbacks
ISDA has published (PDF 363 KB) its timeline for the implementation of IBOR fallbacks. The timetable involves 12 steps and is expected to culminate in the finalisation of EUR LIBOR and EURIOR fallbacks in early 2020. The completion of the timetable below will be key in the transition to RFRs, providing a mechanism for legacy contracts to transition to RFRs should a trigger event occur. The 12 step timeline is set out below.
- ISDA to produce description of methodology for adjustments and questions regarding open issues - January-June 2019
- Public sector antitrust/competition review of calculation methodology to be implemented - January-September, 2019
- Selection of vendor to publish adjustments - February-April 2019
- Publication of supplemental consultation for USD LIBOR, HIBOR and CDOR -March -April 2019
- Publication of request for market feedback on pre-cessation issues and related documentation solutions for derivatives - March-April 2019
- Publication of complete methodology to be implemented and questions regarding open issues for public review and comment - July 2019
- Vendor build - August-[September/December] 2019
- Market participant infrastructure build (including CCPs) - August-[September/December] 2019
- Finalise amendments to the 2006 ISDA Definitions and protocol to include the amended definitions in existing transactions -August-September 2019
- If receive relevant public sector approval, release final amendments to the 2006 ISDA Definitions and protocol - September-December 2019
- Publication of supplemental consultation for EUR LIBOR and EURIBOR - TBD after publication of ESTER
- Finalise amendments to the 2006 ISDA Definitions for EUR LIBOR and EURIBOR and protocol to include the amended definitions in existing transactions - TBD after supplemental consultation and related vendor/market participant infrastructure build
FSB Ietter to ISDA
In March, the FSB sent a letter to ISDA raising issues that the Official Sector Steering Group (OSSG) believes ISDA are moving to address. The letter touches on the potential need for an additional trigger in the event the regulator determines LIBOR to be non-representative; the timing of future consultations; and the governance and transparency requirements. The request for transparency over how the ISDA Board Benchmark Committee comes to its decision is important. Given the potential value transfer implications of triggering the ISDA fallbacks, the process to determine the methodology needs to be transparent to the market.
IFRS Staff Paper
In February, an IFRS staff paper (PDF 234 KB) on IBOR Reform and its Effects on Financial Reporting was prepared for the International Accounting Standards Board (IASB) to assess the effects on financial reporting of the potential discontinuation of IBORs. The paper sets out six recommendations for amendments to accounting legislation and how entities should provide disclosures and apply amendments. The potential accounting impacts of this transition are large and without resolution could cause large Profit and Loss swings for firms. Firms will need to closely monitor developments and assess the potential implications to their balance sheet.
Letter to IASB
In March 2019, the Working Group on Sterling Risk Free Reference Rates wrote (PDF 1.80 MB) to the International Accounting Standards board (IASB). The letter welcomes the IASB's decision to add IBOR Reform to its Standard Setting agenda. The letter however requests that the IASB accelerates its work on phase 2 highlighting areas around hedge accounting and modification of contract terms which require addressing. This letter will illustrate, to Firms, the importance of including accounting policy teams involved in transition programmes to avoid incurring unintended accounting impacts through the transition.
As the RFR working groups and industry bodies have refined their timelines and priorities, firms should look to do the same. Refining your strategy and determining the priorities for 2019 will help to ensure a successful transition programme in later years.
To find out more on how to manage the transition from LIBOR to RFR, visit our Evolving LIBOR insights hub.