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

ICE Benchmark Administration (IBA) published a feedback statement for its December 4, 2020, consultation on its intention to cease the publication of LIBOR settings. The statement makes clear that in the absence of panel bank support and without the intervention of the Financial Conduct Authority (FCA), it is not possible for IBA to publish the relevant LIBOR settings on a representative basis after the intended cessation dates suggested in the consultation.

As a result, on March 5, 2021, the FCA announced the dates on which the panel bank submissions for all LIBOR settings will cease, after which representative LIBOR rates will no longer be available.

The FCA confirmed that all LIBOR settings will cease to be provided by any administrator or no longer be representative:

  • immediately after December 31, 2021, in the case of all GBP, EUR, CHF and JPY settings, and the 1-week and 2-month USD settings; and
  • immediately after June 30, 2023, in the case of the remaining USD settings.

The International Swaps and Derivatives Association (ISDA) issued a statement on March 5, 2021, in response to the announcement by the FCA on the future cessation and loss of representativeness of LIBOR benchmarks. ISDA confirmed that the FCA’s announcement constitutes an index cessation event under IBOR Fallbacks and Supplements and the ISDA 2020 Fallbacks Protocol for all 35 LIBOR settings. As a result, the fallback spread adjustment published by Bloomberg is fixed as of the date of the announcement.

The fallbacks will automatically occur for outstanding derivatives contracts that incorporate the IBOR Fallbacks Supplement or are subject to the ISDA 2020 Fallbacks Protocol on the dates immediately after:

  • December 31, 2021: for outstanding derivatives referenced to all EUR, GBP, CHF and JPY LIBOR settings.
  • June 30, 2023: for outstanding derivatives referenced to all USD LIBOR settings.

These important announcements have triggered reactions from various national working groups with impact on the transition path of the relevant currency LIBORs (see below a high-level transition timeline).

GBP LIBOR

The Working Group on Sterling Risk-Free Reference Rates (GBP RFR WG) welcomed the announcement made by the FCA, highlighting that these announcements provide certainty over the timeline for the transition. The GBP RFR WG’s priorities and roadmap also provide a timetable to support market participants to be fully prepared for the end of GBP LIBOR ahead of the end of 2021.

In the same dynamic, the Prudential Regulation Authority (PRA) and the FCA jointly issued a Dear CEO Letter which sets out supervisory expectations of the transition from LIBOR to RFRs. In that letter, the PRA and FCA confirmed that they are expecting all firms to meet the GBP RFR WG’s milestones as well as the targets of other working groups and relevant supervisory authorities as appropriate.

USD LIBOR

On March 5, 2021, the Alternative Reference Rates Committee (ARRC) also commented announcements made by the FCA and IBA regarding LIBOR panels end, stating that the end of this long transition road is now clear. ARRC further confirmed that these announcements constitute a Benchmark Transition Event with respect to all USD LIBOR settings under ARRC-recommended fallback language. Accordingly, market participants now know when a representative USD LIBOR will end and what its associated spread adjustments will be in certain terms. On March 17, 2021, ARRC announced that it has selected Refinitiv to publish its recommended spread adjustments and spread-adjusted rates for cash products. Refinitiv will publish ARRC-recommended spread adjustments to SOFR-based rates and spread-adjusted SOFR-based rates for cash products that transition away from USD LIBOR.

Furthermore, the ARRC published its “Progress Report: The Transition from USD LIBOR”, outlining key reference rate reform efforts, progress to date, and areas requiring further work. Nevertheless, ARRC announced later this month that it will not be in a position to recommend a forward-looking SOFR term rate by mid-2021 and encourages market participants to continue to transition from LIBOR using the tools readily available now.

CHF LIBOR

The Swiss Stock Exchange (SIX) showed its intention to support the transition away from CHF LIBOR by announcing new tenors to complement already existing SARON compound rates and indices. The announcement highlights that these new maturities support the market for benchmarking and are essential for financial products like mortgages, deposits, bonds, floating rate notes, swaps and futures.

The European Commission (EC) also published its consultation on the statutory fallback rate for CHF LIBOR. The consultation highlights that the absence of the 3 month CHF LIBOR setting could raise financial stability concerns and proposes to follow the recommendations of the Swiss Franc National Working Group (CHF NWG) to replace the 3 month CHF LIBOR with the 3 month SARON compounded rate based on last reset methodology.

Finally, the CHF NWG published this month an updated version of its Starter Pack which provides market participants with an up to date overview about all the relevant aspects of the transition.

EY Perspectives

Over this last month there have been some very clear announcements from the regulators on the end dates for LIBOR, as well as on impending milestones.

Given the supervisory guidance to cease entering new LIBOR contracts by December 31, 2021, it is important that market participants should be prepared to use the tools available now and not await the future expected term rate structures or increased liquidity in certain RFRs. We would particularly urge users of longer interest periods to think carefully about appropriate alternatives to LIBOR.

EY has been leading a number of activities in our efforts to support clients in their transition away from LIBOR, including:

  • Contracts due diligence and transition solution design in line with observed market practices and emerging industry standards
  • Drafting of fallback and switch clauses adapted to our clients’ business and client base
  • Contract digitization and management solutions reflecting the industry need for a more efficient contract data management brought into might by the IBOR transition challenges 
  • Running awareness sessions to facilitate their client communication, internal discussions and operational readiness
  • Developed an MI dashboard to capture LIBOR and RFR exposure across Global Markets, for internal trend analysis and to meet PRA/FCA reporting requirements
  • Developed a heatmap to capture LIBOR conduct and client risk
  • Technical analysis of products, payoffs and calculation of P&L impact on structured notes population across Global Business Lines
  • Extension of P&L analysis and drafting of alternate trade solution for Global Markets OTC exotic derivatives
  • Identifying and analyzing loans issued with hedging swaps across Global Markets and Global Banking
  • Supporting Governance and Regulatory Oversight with deliverables status, key issues, risks and dependencies

Key client discussions are centered around the following topics:

  • How Banks are adhering to regulatory milestones established by national RFR working groups
  • Approach for active transition vs transition at cessation and also the use of forward rate vs 5YHM
  • Operationalisation of ISDA fallbacks in the bi-lateral space (considerations for changing trade representation to RFR post cessation across the front to back stack)
  • Deep dives on executive MI for client transition across cohorts and per cohort, effectiveness of the current governance structure vs. more agile models which could streamline progress
  • Regulators’ increased pressure on banks timeline to complete model implementation, validation and model submission

It remains a busy time on transition for all and we look forward to continuing to work with the market on the transition.

Swiss highlights:

  • SIX announced to customers that it’s complementing existing SARON compound rates and indices with further tenors
  • EC published consultation on the statutory fallback rate for the CHF LIBOR
  • CHF NWG published key March 2021 updates
  • New Swiss banks offering SARON-based cash products

Eurozone specific highlights:

  • ECB to start publishing compounded €STR and index on April 15, 2021
  • EFMLG and FMLC issued joint letter on LIBOR transition

International highlights:

  • ISDA published statement on FCA LIBOR announcement
  • Bloomberg published fixed spread adjustments
  • ISDA published its February 2021 ISDA-Clarus RFR Adoption Indicator
  • ISDA European Annual Legal Forum: opening remarks
  • Eurex Clearing announced LIBOR transition plan
  • LCH published supplementary statement on solution for outstanding cleared LIBOR contracts
  • IIFM published white paper “Global Benchmark Rates Reforms and Implications of IBOR Transition for Islamic Finance”
  • ISDA published guidance in response to NY Fed’s statement regarding the publication of SOFR on, and for April 2, 2021
  • ISDA published statement on JBATA announcement on yen and euroyen TIBOR

UK specific highlights:

  • UK Finance published document “safer rates for business”
  • GBP RFR WG published questions and answers document on end-Q1 recommended milestone
  • GBP RFR WG published February 2021 newsletter
  • IBA introduced “beta” version of ICE SONIA Indexes to assist UK lending markets transition to SONIA
  • IBA published feedback statement on its intention to cease the publication of LIBOR settings
  • IBA announced record activity in Gilts and Sterling rates complex
  • FCA announcements on the end of LIBOR
  • GBP RFR WG issued a statement welcoming announcement on the end of LIBOR
  • FCA issued feedback statement on the exercise of the FCA’s powers under Article 23D BMR
  • GBP RFR WG updated best practice guide for GBP loans
  • FSMB published transparency draft on use of TSSRs
  • BoE, FCA and GBP RFR WG welcomed FSMB’s transparency draft
  • BoE updated risk management approach to collateral referencing LIBOR
  • LMA published note in respect of the use of TSSRs
  • PRA and FCA issued Dear CEO Letter
  • LMA updated RFR referencing loans’ list
  • LMA published exposure draft RFR documentation as recommended forms
  • LMA published write-up of interview “LIBOR transition is here – asset managers at the ready”

US specific highlights:

  • ARRC commended decisions outlining the definitive endgame for LIBOR
  • ARRC confirmed a Benchmark Transition Event has occurred under ARRC fallback language
  • ARRC published FAQs document regarding the occurrence of a Benchmark Transition Event
  • ARRC announced the “SOFR Symposium: The Final Year”
  • ARRC announced Refinitiv as publisher of its Spread Adjustment Rates for cash products
  • ARRC published progress report on transition from USD LIBOR
  • ARRC provided update on forward-looking SOFR term rate
  • ARRC published white paper on suggested fallback formula for USD LIBOR ICE Swap Rate
  • ARRC released supplemental recommendation of hardwired fallback language for business loans
  • ARRC published white paper on approach to using SOFR in new issuances of a variety of securitized products
  • ARRC published February-March 2021 newsletter