September 4, 2019 - The Office of Information and Regulatory Affairs announced last week that the Treasury Department will consider issuing guidance to define the tax implications of LIBOR transition, signaling the third key phase of regulatory relief sought by private sector groups overseeing transition to a new loan reference rate.

The announcement indicates that Treasury will likely not consider transitions from LIBOR to an alternative reference rate as a “taxable event” that would trigger income gains or losses.

The announcement is a response to private sector groups that have identified regulatory hurdles to a successful LIBOR transition. Primary among these groups is the ARRC, of which the LSTA is a member.

In April, the ARRC submitted a letter to the Treasury Department noting that while LIBOR is likely to exist through the end of 2021, early modifications to loan contracts “will help ensure an orderly market transition away from IBORs, and therefore any significant tax barriers to completing them should be addressed as promptly as possible.”

The ARRC added that a delay in implementing tax guidance “will likely slow down [the orderly transition] process and, as a consequence, lead to market disruption if the transition away from IBORs occurs in a rushed and disorderly manner.”

Among the various areas for which the ARRC requested relief, the question whether a taxable event would occur upon the transition to a new rate was “the most critical.”

OIRA’s announcement signals the third set of intended regulatory relief provided in as many months to the loan market on LIBOR transition.

In June, the Financial Accounting Standards Board announced that loan market participants will be able to assume that LIBOR transition will not create new loans but will only “modify” currently existing ones, relieving them of a great deal of tedious accounting work. And in July, the FASB announced that it will issue relief ensuring that LIBOR transition will not lead to disruptions in hedging relationships that could cause financial statement volatility.

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