ARRC – Page 2 – Duane Morris Banking and Finance Law

June 24, 2021 by Roger S. Chari

LIBOR Transition: Regulator Comments- LIBOR is Dead, BSBY is in Trouble, and Ameribor Gets a Pass

Top regulators from the SEC, the OCC, the CFTC, the Federal Reserve and the Department of the Treasury spoke in unison at an eventful meeting of the Financial Stability Oversight Counsel on June 11, 2021.

Key takeaways:

(1) if you are a regulated bank that is delaying transition in hope that alternatives to SOFR will develop, the OCC is coming for you. The warning was expressed in more cordial terms than that, but no one wants to be unprepared when the OCC comes knocking.

(2) The chair of the SEC, who was also the co-chair of the IOSCO group that wrote the 2013 IOSCO principles by which replacement rate benchmarks are measured, doesn’t believe that Bloomberg’s BSBY rate meets the standard. This bluntly worded statement is at odds with the self-certification by Bloomberg, which was confirmed by an “assurance review” of an unnamed “global, independent accounting firm” in April. Awkward, to say the least.

(3) Although not mentioned by name, Ameribor appeared to get a pass, at least for now. Lenders and borrowers in non-capital markets are free to choose among rates that meet their needs, as long as it’s not BSBY. So are lenders and borrowers in the capital markets, as long as it’s SOFR.

The actual prepared statements are more engaging and provide useful insight. We take a deeper dive in our recent Alert.

Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

June 14, 2021June 15, 2021 by Roger S. Chari

LIBOR Transition: Term SOFR Expected “Days” After July 26

June 8, 2021, was an eventful day in the LIBOR transition. That morning, the Interest Rate Benchmark Reform Subcommittee of the Market Risk Advisory Committee (MRAC) of the Commodity Futures Trading Commission (CFTC) announced its recommendation that starting July 26, 2021, interdealer brokers should replace trading of LIBOR linear swaps with trading of SOFR linear swaps. That same morning, the Alternative Reference Rates Committee of the New York Federal Reserve (ARRC) praised the MRAC recommendation and announced that once the switch occurs, it will be in a position to recommend CME SOFR term rates “very shortly thereafter.” June 8 also happened to be the date of the ARRC’s planned SOFR Symposium. Regulatory speakers at the symposium were confident that the July 26 date for the switch was realistic and achievable. ARRC Chair Tom Wipf clarified that he expects “very shortly thereafter” to mean “days, not weeks.”

It’s a stunning reversal in what otherwise appeared to be a dim future for Term SOFR just a few months ago. Read on our Alert, published today, to learn more about the recent developments relating to Term SOFR and its competing rates.

Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

June 8, 2021June 14, 2021 by Phuong (Michelle) Ngo

LIBOR Transition: BSBY Out of the Gates First

With all the regulator and market focus on SOFR as the LIBOR replacement of choice, it’s easy to forget that there are other replacement rates vying for market attention. We’ve written about Ameribor and highlighted some of the recent developments in its adoption. For the most part, support for Ameribor has come from smaller Main Street banks looking for a credit-sensitive rate that more closely matches the unsecured basis on which they borrow funds.

On October 15, 2020, Bloomberg threw its hat into the ring with its Bloomberg Short Term Bank Yield Index (BSBY). After a couple of months of publishing the rate on an indicative basis, Bloomberg launched the rate on January 20, 2021, and announced in early March that the rate is available for use as a replacement benchmark rate. Read on our recently published Alert to learn more about BSBY and recent developments relating to the rate.

Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.

June 2, 2021 by Roger S. Chari

LIBOR Transition: Term SOFR Coming “Soon”

After the ARRC announced a week before the Memorial Day weekend that market participants can plan on a recommendation of CME Group as the administrator of a term SOFR reference rate “soon”, it is a bit optimistic to expect that we would return from the holiday to a formal announcement on Term SOFR. Nonetheless, it is an encouraging development in what has been a rollercoaster ride on the fate of Term SOFR. In March of this year, it seemed as though Term SOFR might not come until 2022, with some dire predictions that it might not ever truly develop.

Exactly what “plans” market participants should make is still an open question. Based on developments earlier this year and the ARRC’s March announcement, some lenders are well on their way to originating daily SOFR loans even though they may have preferred to use Term SOFR. Term SOFR still is not here yet, and it remains to be seen what limitations regulators and the ARRC may put on it. In that regard, the ARRC’s key principle that Term SOFR should have a “limited scope of use” may cause some lenders to remain cautious. To hear company-side organizations, borrowers are all in favor of SOFR, including Term SOFR, if only they could find lenders willing to make SOFR loans at this point.

Our recent Alert explores some of the practical considerations surrounding the ARRC’s announcement.

Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo, and Han Wang.

March 30, 2021 by Roger S. Chari

LIBOR Transition: Hardwired Language Rewired

Last week was quite eventful in the world of LIBOR transition, from the ARRC’s SOFR Symposium, to the passage of LIBOR transition legislation in New York for tough legacy contracts, to the release of supplemental fallback language for syndicated and bilateral loans. The hardwired language has come a long way- the original version was barely used, but the update last summer has achieved broad adoption in new and amended loans. What does the latest iteration have to offer, and is it worth adopting at this point?

Compared to the various versions of amendment approach language that have evolved in the market, the hardwired approach offers parties more certainty as to what the replacement benchmark will look like. The details that remain tend to be more administrative in nature and are hopefully less prone to disputes. That said, the 2020 hardwired language is hardly simple or easy to understand. Many of the details, such as the end date for LIBOR, the availability of SOFR and the spread adjustment, remained unresolved when the language came out. This necessitated drafting in the alternative and using broad descriptive language to cover concepts that would develop in the future.

Fast forward eight months to the March 5, 2020 announcements of the FCA and the IBA, and clarity on those and certain other details is now here. Rather than saying that LIBOR will one day be phased out, the date is fixed. Although Term SOFR is still a question mark, daily simple SOFR is operational now, so there is no need for loan parties to fumble around trying to figure out what the replacement rate should be. The formal announcement of the end of LIBOR also set the market-agreed calculation of the SOFR spread adjustments, which Bloomberg dutifully computed the same day.

All of these are good changes to update in the hardwired language. The question remains whether they are worth adopting at this time. In concept, it is simple enough to update the template forms for new loans. However, it involves more effort, coordination and time than one might expect and introduces yet another variation in the loan portfolio. The backdrop for these changes is that by the end of 2021, and preferably sooner, all lenders should stop originating LIBOR loans, even with updated hardwired language, and only originate SOFR loans. Different lenders are at different stages of readiness for this task, with some ready to make SOFR loans in the coming weeks and months, and others likely to be pushing the New Year’s Eve deadline. It is a monumental task involving many departments at a bank and requires substantial drafting and thought.

To the extent that revising the hardwired language detracts from this effort, a lender might determine that the existing hardwired language is good enough for the remaining LIBOR loans that it will make this year. If a lender is switching to SOFR by mid-year, it may not be so many loans. The ARRC drafted the 2020 language to encompass the SOFR future, however that future might develop. The value of the updated ARRC language is that it takes the recent developments and shows market participants the practical effect those developments have on the SOFR future. This benefit can be obtained whether or not the updated language is actually implemented in any particular loan agreement.

Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo, and Han Wang.

August 27, 2020June 17, 2021 by Duane Morris

Is There Room for AMERIBOR in a SOFR Future?

With the phase out of LIBOR just over a year away and the ARRC having identified the Secured Overnight Financing Rate (SOFR) as its preferred replacement for US dollar loans, it appears that the market has the guidance it needs to make the transition.

Not so fast, say some Main Street banks. SOFR may work for much of the loan market and particularly larger banks that can borrow on a secured basis. However, this does not represent the reality for many smaller and regional banks, which often can borrow only on an unsecured basis. Using SOFR can lead to a mismatch between the borrowing risk that such banks take and the interest they can earn on their loans.

What are such banks to do? Some of them have voiced their support for an alternative LIBOR replacement rate―the American Interbank Offered Rate (AMERIBOR).

Continue reading “Is There Room for AMERIBOR in a SOFR Future?”

August 18, 2020June 17, 2021 by Duane Morris

A Hot Issue for a Hot Summer: Time to Understand ISDA IBOR Benchmark Fallbacks

As we patiently wait for the International Swaps and Derivatives Association (ISDA) to publish its long planned IBOR Fallback Protocol and IBOR Fallback Supplement for interest rate derivatives, we thought we would highlight some recent announcements on the topic.

According to ISDA’s letter on July 22, 2020 to the Alternative Reference Rates Committee (ARRC), ISDA planned to finalize the Protocol and the Supplement by the end of July. On July 29, 2020, ISDA announced that it would publish the Protocol “soon”. This is hardly the first time that things have been delayed, but it’s important to get it right. Among other things, it’s possible that ISDA is still waiting for a positive business review letter from the US Department of Justice and similar feedback from competition authorities in other jurisdictions.

Continue reading “A Hot Issue for a Hot Summer: Time to Understand ISDA IBOR Benchmark Fallbacks”

August 10, 2020 by Phuong (Michelle) Ngo

For LIBOR Transition Procrastinators, SOFR Starter Kit to the Rescue!

LIBOR is going away. It was a distant pronouncement in 2017, and many thought it wouldn’t happen, or would get delayed. But it’s coming. Soon. December 31, 2021 may still seem a long way off, but there’s a lot to do between now and then. Market participants may be forgiven for concentrating on the global pandemic the last few months, but regulators in many arenas have stepped up their efforts in the past month to get the word out on LIBOR transition and get everyone moving forward on the right track.

Following its Summer Series on LIBOR transition, on August 7, 2020, the Alternative Reference Rates Committee of the New York Fed published the SOFR Starter Kit, a set of factsheets to inform the public about the transition away from USD LIBOR to SOFR. The SOFR Starter Kit is intended to ensure market readiness for the transition and help participants in markets using USD LIBOR to quickly familiarize themselves with the background information of, and main issues related to, the transition. The SOFR Starter Kit has three parts:

Part I (History and Background) summarizes the background on USD LIBOR, the history of the ARRC, and its selection of SOFR.
Part II (Key Facts about SOFR) explains how SOFR works, facts by numbers about SOFR, as well as common questions and misconceptions about the SOFR.
Part III (SOFR Next Steps) lays out numerous tools that the ARRC has made available to facilitate a smooth transition from USD LIBOR to SOFR, including a set of best practices, the User’s Guide to SOFR along with several ARRC-recommended conventions, the recommended fallback language for voluntary use in USD LIBOR-linked contracts, and other helpful tools from the ARRC.

Continue reading “For LIBOR Transition Procrastinators, SOFR Starter Kit to the Rescue!”

August 6, 2020August 7, 2020 by Phuong (Michelle) Ngo

Hardwired for a Smoother LIBOR Transition?

The London Interbank Offered Rate (LIBOR), which has served as a reference rate for approximately $350 trillion of debt and derivatives, will be phased out after December 31, 2021. In the United States, the Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve Board and the New York Fed, has been tasked with ensuring a successful transition from USD LIBOR to a more robust reference rate. In June 2017, the ARRC identified the Secured Overnight Financing Rate (SOFR) as its recommended alternative to USD LIBOR. In April 2019, the ARRC first published recommended fallback language for syndicated business loans. At the time, the recommendations provided two approaches: an “amendment approach”―which delays all decisions about the successor rate and adjustment until a future date―and a “hardwired approach”―which hardwires the priority of replacement rates to be selected into the credit agreement upon origination based on what replacement rates are available at the time of replacement and provides for an easier amendment of related terms.

The syndicated lending market has largely adopted the amendment approach so far. In June 2020, however, the ARRC released refreshed recommendations regarding fallback language for U.S. dollar-denominated syndicated business loans that reference LIBOR. Unlike the April 2019 recommendations, the June 2020 recommendations provide only for hardwired fallback provisions. Read on to see how our Alert, published today, can help you discern the differences between the hardwired approach and the amendment approach and determine which works best for you.

Continue reading “Hardwired for a Smoother LIBOR Transition?”

July 24, 2020May 5, 2021 by Roger S. Chari

ARRC Pumps Up the Summer Heat on LIBOR Transition

While the COVID-19 pandemic has taken center stage the past few months, the transition away from LIBOR has been continuing in the background, almost unnoticed at times. Some market participants have questioned whether the disruption caused by COVID-19 will delay the LIBOR transition process. The proposed timelines have stretched a bit, but regulatory authorities have been adamant that the December 31, 2021 deadline remains firm.

Earlier this month, the Alternative Reference Rates Committee of the New York Federal Reserve (ARRC) began a full court press to make the case for transitioning to SOFR and guide market participants to that goal. Tom Wipf, the chair of the ARRC, spoke at webinars hosted by the Loan Syndications & Trading Association (LSTA) and the International Swaps and Derivatives Association (ISDA). The ARRC also kicked off a SOFR Summer Series of webinars open to the public. The speakers include many top officials and industry leaders, and their insight is invaluable. There are also lively questions and answers from the moderator and the internet audience.

Continue reading “ARRC Pumps Up the Summer Heat on LIBOR Transition”