August 24, 2021 - by Ellen Hefferan. The LSTA is currently updating Section 6 of the Confirm Standard Terms and Conditions (STCs) to expand the scope of cost of carry to accommodate additional non-LIBOR benchmarks, in particular credit sensitive rates. Below please find links to the exposure drafts of the STCs and to blacklined versions which show the proposed revisions to the existing January 2021 STCs.
- Standard Terms and Conditions for Primary Allocation Confirmations: Exposure Draft and Blackline
- Standard Terms and Conditions for Par/Near Par Trades: Exposure Draft and Blackline
- Standard Terms and Conditions for Distressed Trade Confirm: Exposure Draft and Blackline
Since the Trade Confirms were last published in January 2021 there have been a number of important developments with respect to LIBOR transition, namely the emergence of credit sensitive rates and the ARRC’s recommendation of CME’s Term SOFR Rates. These rates were not contemplated in the January 2021 Confirms. Although the loan market has yet to meaningfully adopt non-LIBOR rates, with less than 5 months to go before LIBOR loan originations end, we expect to see non-LIBOR syndicated loans soon. Given that, it is important that the LSTA’s Confirms can support the trading of all syndicated loans, which may mean supporting the trading of loans that reference several different benchmarks. As a stop gap measure, while the market digests the move to new benchmarks, the LSTA has consulted with the LSTA’s Liquidity Committee and loan market vendors to provide an interim cost of carry solution which 1) allows for the trading of all non-LIBOR syndicated loans and 2) is supported by loan systems and operations. A summary of how the revised cost of carry provisions work as well as details of what to expect in the coming months can be found below.
Cost of Carry
Under the revised regime, there are different rates 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.
- Trades of LIBOR and Alternate Base Rate (ABR) referenced loans will continue to use average 1M LIBOR – there is no change.
- Trades of daily RFR referenced loans, for example, Daily SOFR or Daily SONIA referenced loans, will calculate cost of carry based on the average of the daily relevant risk-free rates, Daily SOFR or Daily SONIA, respectively in this example.
- Trades of Term SOFR referenced loans will calculate cost of carry using an average of Daily SOFR.
- Trades of credit sensitive rate referenced loans will calculate cost of carry using an average of the daily RFR relevant for the currency in which the debt is denominated. For instance, the trade of a BSBY-referenced USD loan will use average daily SOFR for cost of carry calculations.
- It is not expected that credit sensitive rates would be used in non-USD loans
- For loans referencing any benchmark other than those explicitly addressed in Section 6, cost of carry will be calculated using an average of the daily RFR relevant for the currency in which the debt is denominated.
- However, if, on the last day of the Delay Period, the debt references both a LIBO Rate and any other one or more benchmark rates (other than an ABR for which cost of carry will continue to be calculated using average 1 M LIBOR), cost of carry will be calculated based on the daily average of the relevant risk-free rates.
As one can plainly see from the description above, having a multitude of cost of carry calculations is cumbersome and suboptimal. To that end, the LSTA Liquidity Committee with the support of the LSTA Board is developing a long-term, streamlined solution with the aim of having a single cost of carry calculation that would be used in all loan trades. Once finalized and operationalized, the LSTA Trade Confirms will be updated again (likely later this year).
Please contact me if you have any questions. These documents will go live on September 13, 2021.