As many of you will be aware, LIBOR is being phased out over the course of the next few months. As a result, coverage on the topic is likely to pick up and so we at the ACT decided that the most efficient use of your time would be if we were to pull relevant developments together in a single monthly update, of which this is the first. In addition, do visit the ACT LIBOR page which we will continue to update on an ongoing basis.
This month we focus on the upcoming Q1 deadline in the GBP markets – after this date no loans, and only very limited derivatives should be executed against LIBOR.
The GBP markets
The Working Group on Sterling Risk-Free Reference Rates (RFRWG) which is made up of buy side and sell side market participants with official sector (FCA and Bank of England) as ex-officio members, published a roadmap for 2021 which can be found at: Working Group on Sterling Risk-Free Reference Rates (RFRWG) top level priorities - 2021 (bankofengland.co.uk)
Their top-level priorities are set out (with ACT emphasis) as:
a) by end-Q2 2021, cease initiation of new GBP LIBOR linked non-linear derivatives* that expire after the end of 2021; and,
b) by end-Q3 2021, complete active conversion where viable
* Except for risk management of existing positions
This means that if you are planning to raise debt this year, unless you complete the transaction before the end of Q1, the reference benchmark will not be LIBOR but either SONIA or an alternative reference benchmark such as bank base.
And, if you do complete before the end of Q1, if the transaction matures after the end of 2021, it will need to include some sort of conversion route away from LIBOR – preferably using an automatic switch mechanism – so in practice, all new transactions should look to reference something other than LIBOR from here on.
There are numerous useful sources of information:
From introductory/ scene setting videos on our website:
To ‘A Treasurers' Checklist ‘ - useful as you start to plan the transition project:
And guides such as the Slaughter and May ‘A Practical Guide to LIBOR transition setting out in greater detail a number of the implications you will need to consider.
Term Rates – there continues to be much debate about whether the publication of SONIA Term Rates are going to solve the difficulties causes by the ending of LIBOR.
To be clear, the regulators have repeatedly stated that term rates should only be used in certain (very limited) circumstances – such as for trade or Islamic finance where a backward-looking rate will not work. There will be considerable pressure placed on regulated institutions to discourage them from offering term rate solutions in any other circumstances…
Other market developments
In no particular order, it is worth checking out:
Derivatives: the ISDA Protocol is now live from late January– signing up to it establishes effective fallbacks in legacy derivatives transactions. The update to the Master Agreement that went live at the same time means that all new transactions will automatically include these fallbacks.
(for those wondering, fallbacks in derivatives is a big deal because historically the cessation of LIBOR had never been considered as a possibility and so the swaps documentation had no ‘fallback’ plan in the event of that happening…)
Signing the protocol may be a good idea but do consider the potential impact it might have on any economic hedges.
LIBOR-linked bonds: The investment Association has written to companies urging them to move away from LIBOR-linked bonds and offering their support with consent solicitation or buyback programmes where appropriate. Read the letter here.
Tough Legacy: What to do about contracts that cannot, for one reason or another, be moved onto an alternative reference benchmark is a challenge in pretty much every jurisdiction, and the general approach seems to be tending towards some type of legislative solution, to ensure contract continuity. In the UK, HM Treasury has published a consultation: Supporting the wind-down of critical benchmarks and legislation is working its way through the US and European legislatures.
If you think you may have tough legacy contracts (and these may be commercial or financial), it is worth making sure you keep abreast of any legislation. As with so many of these issues, the detail is complicated – beware of unintended consequences.
USD markets
If you have USD borrowings and/or swaps, you might want to keep an eye on pronouncements coming out of the ARRC (the Alternative reference Rates Committee) in the US. Developments in the USD markets are behind those in the UK, not least because their replacement reference rate (SOFR) did not exist prior to 2019.
However, the ARRC have announced that they do not expect LIBOR to be used after the end of 2021 in new transactions and are publishing a number of recommendations related to the replacement benchmarks. Take a look at their recent announcement urging transition.
Next month, we will dive more deeply into developments in the US markets but in the meantime, please get in touch with any comments, questions or feedback. We are particularly interested in hearing how helpful your banks are able to be – this is a huge change for them and the sheer volume of transactions they need to transition is overwhelming. Drop a line to Technical@treasurers.org.
