September 28, 2020 - LSTA members are now well aware that users of LIBOR need to be prepared for a LIBOR cessation by the end of 2021. Across the LIBOR currencies official sector convened groups have recommended appropriate replacement risk-free rates (“RFRs”). For instance, in the US, ARRC, the Fed-sponsored group tasked with spearheading the LIBOR transition, has recommended SOFR as the appropriate replacement for USD LIBOR. 

Most of the transition efforts to date have focused on the origination of loans, but it is important to note that the LSTA trade confirmations reference LIBOR in the definition of “Average LIBO Rate” used in the calculation of “cost of carry” for delayed compensation. This reference arises in the relevant standard terms and conditions (“STCs”) for the Par Confirmation, Distressed Confirmation and Primary Allocation Confirmation. The appropriate replacement for LIBOR in the LSTA trade confirmations has been discussed by the LSTA Liquidity Committee and the LSTA Liquidity Committee’s recommendation, which has been vetted with the LSTA Board, is: 

  • LIBOR-referenced facilities should continue to have LIBOR-based cost of carry apply.
  • RFR-referenced facilities should have the relevant cost of carry calculations be based in the respective RFR. For instance, the trade of a SOFR-based loan facility would have cost of carry calculated based on SOFR.
  • RFR-based cost of carry will be calculated on a simple, daily basis during the Delay Period.

While the US market has not yet seen any RFR-referenced loan facilities (USD or multicurrency facilities), the LSTA believes it is important that to be prepared and have trading documentation that supports the trading of RFR-referenced loan facilities when they are originated.
 
Next Steps

The Trade Practices and Forms Committee received proposed drafting changes for the trade confirmations last week and comments are requested by Friday, October 16th. For ease of review, we have only included a draft of the Par Confirmation STCs. Once finalized, identical revisions will be included in the Distressed Confirmation STCs and Primary Allocation Confirmation STCs and those documents will be distributed in exposure draft form together with the Par Confirmation STCs. The draft Par Confirmation STCs are available here and a blackline against the currently effective STCs is available here.

For more information, please contact Tess Virmani.

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