LIBOR Transition - Summer Reading (and some actions)

The transition away from LIBOR is picking up pace with a number of important publications being published over the past week or so, just in time for us to take them to the beach – or the back garden, which is probably warmer in the UK right now...

These publications will no doubt be shared widely in the coming weeks but, as many of you have expressed an interest, we (with thanks to our colleagues at the LMA) have attempted to provide a summary of the key publications below.

Please do read them and respond where appropriate.

LIBOR transition is going to be a major challenge for corporates during the next few years and arguably, the sooner we can start to transition, the fewer the problems will be.

So, appearing in the order of publication:

Andrew Bailey Speech on interest rate benchmark reform: transition to a world without LIBOR – 12 July

The full text of the speech can be accessed here.

Messages in the speech include:

• Firms should treat the discontinuation of LIBOR as something that will happen and which they must be prepared for.
• The FCA hears the demand in cash markets for forward-looking term rates in syndicated loan markets and supports the development of forward-looking term rates derived from the RFRs.
• Fall back language should not be relied upon as the primary mechanism for transition.  The best means for transition is to start moving away from LIBOR in new contracts (including when loan contracts come up for renewal, renegotiation or roll-over, taking the opportunity to move from LIBOR to alternative benchmarks).
• There should not be reliance on the continuation of LIBOR or on a synthetic LIBOR.
• Firms that the FCA supervise will need to be able to demonstrate to FCA supervisors and their PRA counterparts that they have plans in place to mitigate the risks, and to reduce dependencies on LIBOR.

FSB statement on interest rate benchmark reform: overnight risk-free rates and term rates – 12 July

The statement can be accessed here.

Messages in the statement include:

• An overnight RFR may not be the optimal rate in all the cases where term IBORs are currently used. The FSB recognises that in some cases there may be a role for term rates, including RFR-derived term rates, or term rates derived from other liquid markets.
• It may not be practicable, desirable or necessary to create an RFR-derived term rate in all currencies. This may be because relevant derivatives markets are not deep and liquid enough to support a robust benchmark, because there are few compelling instances in which such a term RFR is actually required, or because an IBOR is still supported by sufficiently active funding markets.
• Term rates do, however, provide market participants advance knowledge and certainty of their interest rate obligations. In this context term rates can be valuable to some market participants who want or need to plan cash flow to make interest or coupon payments based on a forward-looking rate.
• Inclusion of fall backs is important to mitigate the risk of potential IBOR discontinuance.  Where an IBOR faces significant risk of discontinuance, however, avoiding a reference to the IBOR when the contract is first agreed will be a more effective risk mitigant.
• If future use of term rates is relatively narrow compared with current use of IBORs, this more limited use would be compatible with financial stability.  Term rates could also form part of a fall back in some cash-product contracts which reference an IBOR, notably where that contract requires planned interest or coupon payments based on a forward-looking rate.
• The FSB plans to produce its next full report on progress in November.

ISDA consultation on IBOR fallbacks – 12 July

The consultation can be accessed here.

ISDA is amending its standard documentation to implement fallbacks for certain key IBORs.  The fallbacks will be to the RFRs that have been identified for the relevant IBORs.  The consultation paper seeks input on the approach for addressing certain technical issues associated with adjustments that will apply to the RFRs if the fallbacks are triggered.

The consultation sets out four options to account for the move from a term rate to an overnight rate:

• a spot overnight rate;
• a convexity adjusted overnight rate;
• a compounded setting in arrears rate; and
• a compound setting in advance rate.

Three options are also proposed to calculate a spread adjustment:

• a forward approach;
• a historical mean/median approach; and
• a spot-spread approach.

In each case, the spread adjustment will be fixed at the point the fallback is triggered.

On first reading this is an extremely complex consultation. Over the next few weeks ISDA will be providing further materials to explain the proposals (including hosting webinars and providing FAQs). As additional materials, simpler explanations etc become available, we will share them to the ACT website but please let us know if you’d also like them sent to you directly.

The consultation will run for three months (closing on 12 October 2018) and is open to all market participants.

Risk Free Rate Working Group (RFR WG) Consultation on Term SONIA Reference Rates (TSRR) – July 2018

The consultation can be accessed here.

The Working Group on Sterling Risk-Free Reference Rates have released this Consultation which requests feedback on a number of practical recommendations which are aimed at enabling the development of TSRRs.

Specifically, feedback is requested on:

• Identifying / confirming use cases for TSRR
• how a Term SONIA Reference Rate (TSRR) can be constructed

A large part of this consultation is taken up with questions about how a benchmark might be constructed which some market participants (including corporates) may not feel well positioned to be able to answer.

In recognition of this fact the RFR WG have confirmed that responses that only address on or two of the questions posed will be welcomed and so please do not let this put you off.

We encourage as many corporates as possible (as well as other interested parties) to respond to this consultation by the deadline on 30 September.

Risk Free Rate Working Group (RFR WG) paper on New issuance of Sterling bonds referencing Libor – July 2018

This paper can be accessed here.

This paper is addressed to bond market participants who are continuing to issue, offer and purchase new Sterling bonds referencing Libor, in particular where those bonds mature beyond the end of 2021 when Libor may cease to be available.

If, having read these publications, you’d like to get more involved, there is a Corporate Forum on LIBOR transition which is a sub group of the RFR WG and welcomes corporate members – so please get in touch if you’d like to be involved.

Alternatively, drop us a note at Technical@treasurers.org

Happy reading!