LIBOR Transition: Feedback from FCA Consultation on Synthetic LIBOR

Further to our recent blog post on synthetic LIBOR, the Financial Conduct Authority (the “FCA”) has published its feedback statement on its consultation regarding the legacy use of 1, 3 and 6 month sterling LIBOR from 1 January 2022. The feedback consisted of 36 responses from market participants, with the majority of respondents agreeing with all aspects of the FCA’s proposals. The FCA has confirmed that it will permit legacy use of synthetic Sterling LIBOR by supervised entities, aside from cleared derivatives.

The FCA confirmed that one, three and six-month synthetic Sterling LIBOR will be calculated as the sum of the applicable one, three or six-month Term SONIA Reference Rates provided by IBA and the fixed spread adjustment applicable as part of the ISDA IBOR fallback for one, three or six-month Sterling LIBOR, which is published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol. IBA will be required to continue publishing synthetic Sterling LIBOR for all applicable London business days, except London public holidays.

It is of note that some market participants queried the use of forward-looking term RFR as a component for synthetic LIBOR, suggesting the use of RFRs “in-arrears” instead in order to align with ISDA fallbacks. The FCA’s response to this suggestion was that RFRs “in-arrears” are not suitable for contracts which require the interest rate to be identified up-front, and as such contracts are not realistically able to be amended to work using RFRs “in-arrears”, the use of such rates in the calculation of synthetic LIBOR could have the potential to cause market disruption.

Duane Morris’ LIBOR Transition Team:  Roger S. Chari, Chair, Joel N. EphrossAmelia (Amy) H. HuskinsPhuong (Michelle) Ngo and Natalie A. Stewart.

LIBOR Transition: Synthetic Sterling LIBOR for limited tough legacy loans

As the cessation of LIBOR panels draws closer, the Financial Conduct Authority (the “FCA”) has been looking at ways to mitigate market disruption in respect of tough legacy loans which link to LIBOR but expire after LIBOR is discontinued. As a result, the FCA will require ICE Benchmark Administration to publish a synthetic Sterling LIBOR for the duration of 2022.

Despite at first instance appearing to be a solution for products which have yet to be amended for the cessation of LIBOR, synthetic LIBOR is only intended to be used for certain tough legacy contracts. To learn more about how synthetic LIBOR will work in practice and the legacy contracts which are likely to be able to utilize synthetic LIBOR, check out our Alert here.

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

 

LIBOR Transition: Release the CRITR?

It doesn’t sound quite as scary as the mythical monster from Scandinavian folklore, but it’s not intended to be. CRITR is not a complete game changer in LIBOR transition or trying to be one. What is it then?

The Credit Inclusive Term Rate (CRITR) and the spread only Credit Inclusive Term Spread (CRITS) are the latest products of IHS Markit, a $44 billion company that is set to merge with S&P Global later this year. IHS Markit initially developed CRITS to provide the market with an alternative credit sensitive spread over SOFR. When Term SOFR failed to materialize, it developed CRITR as a standalone credit sensitive rate with forward looking tenors similar to LIBOR.

In a crowded field with Ameribor and BSBY in addition to SOFR, and Term SOFR likely coming by the end of July, and regulators expressing concern about rates other than SOFR, and borrowers not too keen on credit sensitive rates, is there room for a new rate option?  Interest rates are a diverse, multi trillion dollar market, and even a small sliver of it can be lucrative if the rates take hold. Is it right for you? We discuss CRITR and CRITS in more detail in our recent Alert.

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

LIBOR Transition: News Flash- Borrowers Don’t Like Volatile, Credit Sensitive Rates

So far, much of the emphasis on LIBOR transition has been on lenders. As we all wait for alternative rates to hit the market, the Association for Financial Professionals, the National Association of Corporate Treasurers and the U.S. Chamber of Commerce joined in a letter to voice the concerns that borrowers have about the pace of the roll out to the Department of the Treasury, the Federal Reserve, the SEC and the CFTC.

This message isn’t surprising, but the letter contained another component that is worth highlighting. When asked if they prefer SOFR or “potential credit sensitive rates that could move up like LIBOR has done in times of economic stress”, roughly 85% of borrowers surveyed chose SOFR. Put that way, it’s surprising that even 15% of borrowers preferred credit sensitive rates.

Is this the death knell for credit sensitive rates like Ameribor and BSBY before they even get off the ground? Should borrowers really pick only SOFR? The answers are not as simple as they may seem. In our recent Alert, we discuss some of the considerations that borrowers, and lenders that are planning in earnest to offer credit sensitive alternative rates, should keep in mind.

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

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. EphrossAmelia (Amy) H. Huskins, and Phuong (Michelle) Ngo.