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 affects 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 August 2020. You will find more details in our monthly EY IBOR Transition Newsletter, to which you may subscribe through the following link.
In the Eurozone, the European Central Bank (ECB) published a report on preparations for benchmark rate reforms. The report identifies good practices in areas of legal and operations (including contract repapering, fallback provisions and communication strategy), as well as governance, identification of overarching risks, formulation of action plans and ways of identifying exposures and managing associated risks. Furthermore, the ECB plans to carry out a follow-up assessment of banks’ preparedness in the months to come.
In the US, the Alternative Reference Rates Committee (ARRC) chair Tom Wipf sent a letter to ARRC members urging them to sign onto the International Swaps and Derivatives Association (ISDA) IBOR fallback protocol, consistent with the ARRC’s recommended Best Practices. Further, the ARRC updated recommended contractual fallback language for new originations of USD LIBOR denominated bilateral business loans to adjust the “Hardwired Approach” and the “Hedged Loan Approach” that were released in May 2019. It also released its technical reference document intended to support the previously released syndicated loans conventions.
Specifically, in the US loan market, various divergent conventions are being used to calculate interest payments based on SOFR, including compounding-in-arrears (swaps and floating rate notes), daily simple rate (syndicated loans) and compounding-in-advance (mortgage market). These different approaches give rise to uncertainty and hedging concerns. Therefore, the US Treasury is considering the issuance of floating rate notes linked to a compounded version of SOFR in a move to unite the market around a single convention for calculating backward-looking rates.
The International Accounting Standards Board (IASB) issued a set of IBOR-reform-related amendments to the International Financial Reporting Standards (IFRS) which complement those issued in 2019. This is significant due to the fact that the IFRS9 amendments address the accounting for financial instruments across classifications, measurement of financial instruments, and the impairment of financial assets and hedge accounts.
Finally, industry bodies and working groups continue to release recommended contractual fallback language and other guidelines. In this regard, ISDA published collateral agreement interest rate definitions, templates and FAQs, and the Loan Market Association (LMA) announced the publication of a note on the revised replacement of screen rate clause and documentary recommendations of the Working Group on Sterling Risk-Free Reference Rates.
Below is the full list of IBOR transition related developments included in our August 2020 IBOR transition newsletter.
- Development of SARON
Eurozone specific highlights:
- ECB announced public consultation on the publication of compounded EuroSTR term rates
- European Commission launched public consultation on draft amendments to the EU regulation on benchmarks
- ECB published a report on preparations for benchmark rate reforms
- Committee released public consultation on JPY benchmarks
- ISDA published July ISDA-Clarus RFR Adoption Indicator
- ISDA published templates amending rate references to EuroSTR and SOFR in collateral agreements
- MAS auctioned debt linked to an RFR
- LMA published a note on the revised replacement of screen rate clause and additional supplement
- IASB published IBOR related amendments to IFRS
- IASB issued proposed IBOR related IFRS taxonomy update
- ISDA SwapsInfo weekly analysis: August 2020
UK specific highlights:
- GBP RFR WG published its latest newsletter
- BoE started publishing SONIA Compounded Index
US specific highlights:
- CFTC approved “Single-Step Transition” recommendations for USD LIBOR products at CME and LCH
- Fannie Mae released new details on multifamily SOFR ARM loans
- SIFMA supported issuance of SOFR-FRNs
- ARRC released a SOFR starter kit
- ARRC announced delay in IBOR tough legacy legislation due to Covid-19
- Eurex Clearing cleared its first SOFR swap transaction
- ARRC sent a letter urging adherence to ISDA IBOR fallback protocol
- ARRC published IBOR Transition Resource Guides for ARMs and private student loans
- ARRC updated best practices to encourage adherence to ISDA IBOR fallback protocol during escrow period
- ARRC released updated recommended hardwired IBOR fallback language for bilateral business loans
- CFTC issued no-action letters related to the IBOR transition