March 9, 2021 - As we previously reported – and as we had long anticipated – on Friday, March 5, 2021, the Ice Benchmark Administration (“IBA”) and U.K.’s Financial Conduct Authority (“FCA”) issued statements on the formal end of LIBOR. On Monday, March 8, 2021, the ARRC issued a statement confirming that a “Benchmark Transition Event” has occurred under ARRC Hardwired Fallback language. On Tuesday, March 9, 2021, the Federal Reserve (“Fed”) issued SR 21-7: Assessing Supervised Institutions’ Plans to Transition Away from the Use of the LIBOR to “assist examiners in assessing supervised firms’ progress in preparing for the transition”. SR 21-7 states that supervised firms “should demonstrate progress towards moving away from referencing LIBOR in new products” and also outlines “the factors that examiners should consider in assessing six key aspects of transition efforts”. We briefly discuss each of the statements below.
On Friday, March 5, 2021, the IBA stated that as a result of its not having access to input data necessary to calculate LIBOR settings on a representative basis beyond December 31, 2021 for all LIBOR tenors of GBP, EUR, CHF and JPY, and 1-week and 2-month tenors of USD LIBOR, and June 30, 2023 for all remaining USD LIBOR tenors, it would have to cease publication of all 35 LIBOR settings immediately after such dates. IBA did not identify any successor administrator in its announcement. IBA did note that the U.K. Financial Conduct Authority (FCA) could, at a later date, use proposed new powers to require IBA to publish LIBOR settings on a synthetic basis.
Also on Friday, the FCA issued a separate announcement confirming that IBA had notified the FCA of its intent to cease providing all LIBOR settings. While FCA stated that, subject to the establishment of the new proposed powers, it would consult on the issue of requiring IBA to produce certain LIBOR tenors on a synthetic basis, it confirmed that all 35 LIBOR settings will either cease to be provided by any administrator or will no longer be representative on either December 31, 2021 (for all LIBOR tenors of GBP, EUR, CHF and JPY, and 1-week and 2-month tenors of USD LIBOR) or June 30, 2023 (for all other tenors of USD LIBOR.)
On Monday, March 8, 2021, the ARRC released a statement confirming “that in its opinion the March 5, 2021 announcements by ICE Benchmarks Administration and the U.K. Financial Conduct Authority on future cessation and loss of representativeness of the LIBOR benchmarks constitutes a “Benchmark Transition Event” with respect to all USD LIBOR settings pursuant to the ARRC recommendations regarding more robust fallback language for new issuances or originations of LIBOR floating rate notes, securitizations, syndicated business loans, and bilateral business loans.” The ARRC released additional FAQs Regarding the Occurrence of a Benchmark Transition Event.
On Tuesday, March 9, 2021, the Fed released SR 21-7: Assessing Supervised Institutions’ Plans to Transition Away from the Use of the LIBOR to “assist examiners in assessing supervised firms’ progress in preparing for the transition”. Examiners are directed to review firms’ planning for LIBOR cessation in six key areas: (1) transition planning; (2) financial exposure measurement and risk assessment; (3) operational preparedness and controls; (4) legal contract preparedness; (5) communication; and (6) oversight.
Several of the Fed’s identified areas correspond to workflows in the syndicated loan market. First, operational preparedness (Section 3). The Fed flagged questions around inventorying systems and confirming status of vendor updates and implementation of systems that handle replacement rates. The ARRC Business Loans Working Group (“BLWG”) and LSTA have been facilitating operational readiness, working with vendors and lenders to operationalize three SOFR “architectures” (SOFRs “Known in Advance”, e.g., SOFR Compounded in Advance and Forward Looking Term SOFR, Daily Simple SOFR and Daily Compounded SOFR). The LSTA also hosted a series of remediation roundtables.
Second, legal contract preparedness (Section 4). SR 21-7 noted that firms should identify contracts with insufficient fallback language and develop plans to remediate them. New loans originated before December 31, 2021 should have robust fallback language that “includes a clearly defined alternative reference rate after LIBOR is no longer available.” The BLWG and the LSTA have worked extensively to develop hardwired fallback language that works for syndicated loans.
While robust fallback language is critical for loans originated before December 31, 2021, that is not enough. The Fed reiterated that examiners “should evaluate whether the firm has a plan in place to transition away from entering into new LIBOR-based financial contracts after December 31, 2021.” In other words, even though USD LIBOR may continue for legacy contracts through June 30, 2023, the Fed is again laying down a marker to end new LIBOR contracts (including loan origination) after year end. Perhaps fortuitously, the LSTA has developed Concept Credit Agreements for Daily Simple SOFR and Daily Compounded SOFR. We are also finalizing a Daily Simple Multicurrency Risk Free Rate Concept Credit Agreement.
Taken together, it is clear that that LIBOR’s endgame has commenced – but the market has the tools to move.
The LSTA is on the ARRC and co-chairs the ARRC BLWG.