The transition from Interbank Offered Rates (IBOR) to Alternative Risk-Free Rates (RFRs) has an impact on all financial and non-financial institutions operating with the impacted floating reference rates. It effects a wide range of financial instruments on the derivative and cash markets.
This blog edition highlights notable developments made publicly available by the global regulatory community, industry working groups and/or infrastructure providers over the month of June 2020. You will find more details in our monthly EY IBOR Transition Newsletter, to which you may subscribe through the following link.
A notable development on the SARON cash markets is the announcement that Credit Suisse will be launching SARON rollover mortgages in the second half of 2020. In an interview, a member of the Swiss National Bank Governing Board – Dr. Andrea Maechler – confirmed its support for a transition to SARON according to the initial transition plan (i.e. end of 2021) despite the Covid19 delays.
The UK Government and the Financial Conduct Authority (FCA) made important statements reminding that the legislation needs to support regulatory bodies in managing the “tough legacy” contracts whilst the contracts with viable transition options are expected to transition actively earlier on.
The UK Government intends to introduce amendments to the existing law in order to ensure that the FCA’s powers are sufficient to manage an orderly transition away from LIBOR. This includes extending the circumstances in which the FCA may require an administrator to change the methodology of a benchmark, strengthening existing law to prohibit use of an individual critical benchmark whilst giving the regulator the ability to specify limited continued use in legacy contracts and to refine areas of the UK’s regulatory framework for benchmarks to ensure its effectiveness in managing the wind down of a critical benchmark.
The FCA announced that it will publish a statement policy detailing the approach when using their new powers. However, the market participants were reminded that they should focus on active transition away from LIBOR as this is the only way they will have control over their contractual terms when LIBOR has ceased.
The ARRC recommended the hardwired approach for USD LIBOR syndicated loans’ fallback language on top of the original amendment approach. The amendment approach, which most loans are currently relying on, uses loans’ flexibility to create a simpler and streamlined amendment process, but it may not be feasible as thousands of loans must be amended within in a short period of time, with the consideration of the end of 2021 LIBOR cessation deadline. Hence, the adoption of hardwired fallback language is also recommended by the ARRC. Under this approach, the contract falls back to SOFR plus a spread adjustment when LIBOR ceases. As a result, market participants will not be able to take advantage of the then-current market environment to capture economic value. This offers certainty as to what the successor rate and adjustment will be, obviates the need for seeking consent for an amendment, and will likely be more executable on a large number of transactions.
Below is the list of IBOR transition related developments included in our June 2020 IBOR Transition Newsletter.
Swiss highlights:
- Credit Suisse is launching SARON rollover mortgages from the second half of 2020
- The Swiss National Bank supports a timely transition to SARON
- Development of SARON
Eurozone specific highlights:
- Eurex Clearing AG introduced changes for SOFR swaps and €STR discounting
- WG on EUR RFR recommended voluntary compensation for legacy swaption contracts affected by the discounting transition to €STR
- LCH published changes in EUR benchmark interest rate from EONIA to €STR for cash deposit
- EIOPA is publishing bi-weekly information for RFR term structures and symmetric adjustment to equity risk
International highlights:
- LMA published LIBOR transition glossary
- GFMA published IBOR transition documents
- JFSA and BoJ sent letters to CEO’s of financial institutions in Japan regarding their IBOR transition
- IBOR fallbacks – Bloomberg updates
- ISDA updated Bloomberg information on its Benchmark Reform webpage
- BCBS updated Basel Framework FAQs regarding benchmarks
- FMSB published LIBOR transition conduct risk case studies
- BoC became administrator of CORRA
- ISDA Create extended online negotiation to EONIA amendment agreements
- ISDA SwapsInfo weekly analysis
UK specific highlights:
- Sterling RFR WG published survey on impact of Covid-19 on system readiness to enable RFR adoption
- ISDA and UK Finance responded to HM Revenue & Customs regarding tax impacts of LIBOR cessation
- BoE published results of discussion paper on SONIA Compounded Index and SONIA Period Averages
- ICE Swap Rate published consultation feedback on introduction of ICE Swap Rate based on SONIA
- UK government announced intent to enact legislation to amend the UK regulatory framework applicable to critical benchmarks, including LIBOR
US specific highlights:
- ARRC updated its FAQ document
- CFPB took steps to ease LIBOR transition
- Fannie Mae’s updated SOFR-indexed CMOs
- ARRC filed “No-Action Letter” in connection with IBOR transition amendments
- Freddie Mac’s is offering SOFR certificates
- ARRC recommended fallback language for USD LIBOR syndicated loans
- ARRC recommended fallback language for variable rate private student loans and conventions for new SOFR student loans
- ARRC recommended spread adjustments for USD LIBOR cash products
