December 1, 2021 - by Ellen Hefferan. The last version of the LSTA trading documents, published on September 13th, utilizes multiple cost of carry calculations to support the trading of LIBOR-referenced loans, RFR-referenced loans, and CSR-referenced loans. Under this regime, different rates are used for the calculation of cost of carry depending on the benchmark of the underlying loan and the currency in which the loan is denominated. Realizing this as both cumbersome and suboptimal, the LSTA Liquidity Committee, with the support of the LSTA Board, developed a streamlined solution.
Therefore, the LSTA Trade Confirms were updated again on December 1st when the LSTA published revised versions of the Standard Terms and Conditions for the Primary Allocation Confirmation, Par Confirmation and Distressed Confirmation to support the LIBOR transition with ONE cost of carry calculation for trading in ALL loans, regardless of the underlying benchmark of the facility being traded.
For all trades entered into on and after December 1st, the Cost of Carry Rate shall mean (a) the sum of all the individual daily simple SOFRs in the period from (and including) the date two (2) Business Days before the Commencement Date and to (but excluding) the date that is two (2) Business Days before the Delayed Settlement Date (b) divided by the total number of days in such period (c) plus the spread adjustment equal to 11.448 basis points.
Note the addition of the static spread adjustment. This spread adjustment reflects a portion of the structural differences between IBORs and the RFRs used as a basis for the fallbacks – IBORS incorporate a credit risk premium and other factors while RFRs are risk free or nearly risk free. On March 5, 2021, following multiple industry consultations by ISDA, it was determined that the fallback for 1 month USD LIBOR would be based on SOFR compounded in arrears plus a spread adjustment of 11.448 basis points. This spread was calculated using a historical median approach over a five-year lookback period from the date of an announcement on cessation or non-representativeness.
Trades entered prior to December 1st will continue to be governed by the trading documents that were effective on their respective trade dates, so there will be a period when multiple sets of documents (e.g., those published on January 27th and September 13th) will need to be used.
The intent behind the cost of carry calculation as well as the value of the spread adjustment will be reviewed in six months.
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