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 January 2021. You will find more detail in our monthly EY IBOR Transition Newsletter, to which you may subscribe through the following link.

January 25, 2021 marked two critical transition milestones

One the one hand, ISDA IBOR Fallbacks Protocol and IBOR Fallbacks Supplement took effect. These fallbacks will be incorporated into all new derivatives contracts that reference relevant ISDA Definitions. By the launch date, more than 12,000 entities across nearly 80 jurisdictions adhered to the protocol, and which will remain open for adherence.  

On the other hand, the ICE Benchmark Administration’s (IBA) closed its consultation regarding its intention to cease the publication of LIBOR settings. After the feedback period has closed, IBA intends to share the results of the consultation with the FCA and to publish a feedback statement summarizing responses from the consultation shortly thereafter.

This month, we have seen further developments of the documentation standards to facilitate the transition of LIBOR to RFRs

Firstly, the Loan Market Association (LMA) announced the publication of two exposure draft multicurrency term and revolving facilities agreements, incorporating backward-looking compounded RFR rates and forward-looking interbank term rates.

Secondly, the Alternative Reference Rates Committee (ARRC) released conventions for SOFR-Based Intercompany Loans to support non-financial corporations through the LIBOR transition. Following this, the ARRC recommends that new SOFR-based intercompany loans use the 30- or 90-day Average SOFR set in advance, with a monthly, quarterly, semi-annual, annual, or another reset period as is determined appropriate by the firm.

Finally, during this first month of 2021, working groups continued urging action on transitioning to RFRs

Among them, the Working Group on Sterling Risk-Free Reference Rates (GBP RFR WG) published an update to its priorities and roadmap. GBP RFR WG recommended that, from the end of March 2021, GBP LIBOR is no longer used in any new lending or other cash products that mature after the end of 2021. Therefore, all businesses with existing loans in GBP should have by now heard from their lenders about the transition, and those seeking a new or refinanced loan should be offered a non-LIBOR alternative.

Furthermore, the Chairman of the ARRC urged action on transitioning SOFR stating that the firms should immediately stop issuing USD LIBOR based instruments and start writing SOFR into new contracts.

Looking ahead, the key objectives of the organizations should be to:

  • work with urgency toward preparing for no new LIBOR by transitioning all new activity to RFR by the end of this year
  • immediately stop issuing LIBOR-based instruments and start writing RFR into new contracts
  • protect any outstanding LIBOR contracts from uncertainty by amending them to account for LIBOR’s cessation by adopting the switch or fallback language as soon as possible

Swiss highlights:

  • Development of SARON

Eurozone specific highlights:

  • ESMA launched consultation on fines and penalties for benchmark administrators
  • European Parliament adopted final trilogue agreement on EU Benchmarks Regulation’s review
  • EC to reassess EU Benchmarks Regulation in 2022 with view of EUR-denominated indices and IBOR benchmark reform

International highlights:

  • FASB clarified scope of recent reference rate reform guidance
  • ASIFMA launched report on regional readiness challenges for LIBOR transition
  • ICMA included LIBOR transition in quarterly report
  • ISDA published December 2020 ISDA-Clarus RFR Adoption Indicator
  • ISDA encouraged adherence to ISDA IBOR Fallbacks Protocol by its effective date
  • LCH published official position on LIBOR cessation and FRAs
  • Bloomberg launched short term credit sensitive index to support IBOR transition
  • LMA updated RFR referencing loans’ list
  • FSB included benchmark transition in 2021 work programme
  • ISDA 2020 IBOR Fallbacks Protocol took effect
  • ISDA published Transition to RFRs Review: Full Year 2020 and the Fourth Quarter of 2020
  • LMA published exposure draft multicurrency term and revolving facilities agreements incorporating backward-looking compounded rates and forward-looking interbank term rates

UK specific highlights:

  • Refinitiv announced to launch the Refinitiv Term SONIA benchmark on January 11, 2021
  • GBP RFR WG wrote open letter to BISL on fixed fallback spread adjustment
  • BoE published consultation paper: Solvency II: Deep, liquid and transparent assessments, and GBP transition to SONIA
  • GBP RFR WG updated its priorities and roadmap
  • GBP RFR WG published December 2020 newsletter
  • GBP RFR WG updated summary of key attributes of TSRRs’ beta versions
  • GBP RFR WG published minutes of December 2020 meeting
  • GBP RFR WG expects market standard on TSRRs to be released for public comment in February 2021
  • FCA updated LIBOR webpage in relation to margin/clearing duties under EMIR

US specific highlights:

  • CFTC staff provided temporary relief to futures commission merchants regarding certain SOFR-linked investments
  • SEC issued statement on LIBOR transition of municipal securities
  • ARRC Chair Wipf urged action on transitioning to SOFR
  • ARRC released conventions for SOFR-Based Intercompany Loans to support non-financial corporations through the LIBOR transition