LIBOR Transition Advisory Newsletter – August 2021

The past month has seen progress on many fronts and several key announcements from regulators. In the U.S. we have seen the recommendation of the CME-term Secured Overnight Financing Rate (SOFR) by the Alternative Reference Rates Committee (ARRC). This will hopefully provide greater clarity on how to move forward with the U.S. dollar LIBOR transition.

On the other side of the Atlantic, regulators are recommending a move to risk free rates (RFR) first quotation for cross-currency swaps. A similar move for interest rate swaps earlier in the year gave a boost to RFR traded volumes, which will hopefully be echoed here, but also signals the move to increase emphasis on the products in the tough legacy portfolios.

For loan products, an area which has up to now been seen as lagging, guidance from the Sterling working group has been issued as we approach the looming end of Q3 deadline for transition of legacy loans.

We have also seen progress in Asia with the execution of the first RFR-based loans in Singapore.

Overall, we are seeing the transition momentum continuing to build as the clock ticks down.

LIBOR Highlights 

General News

ARRC Formally Recommends Term SOFR, ARRC

• On July 29, ARRC announced that it is now formally recommending CME Group’s forward-looking (SOFR) term rates, following the completion of a key change in interdealer trading conventions on July 26, under the SOFR First initiative.

ARRC Recommends Loan Conventions and Best Practices for Use of Forward-Looking SOFR Term Rate to Accelerate the Transition Away From LIBOR, ARRC

• In anticipation of the ARRC impending formal recommendation of the forward-looking SOFR Term Rates produced by the CME Group, the ARRC is announcing conventions and use cases for how best to employ the SOFR Term Rates to successfully transition away from USD LIBOR.

Refinitiv launches USD IBOR Cash Fallbacks Prototype to Facilitate Industry Transition from USD LIBOR, Refinitiv

• Following the ARRC’s March 2021 announcement that it had selected Refinitiv to publish its recommended spread adjustments and spread adjusted rates for cash products, Refinitiv announced the launch of a prototype rate on August 11.

FSB Issues Statements to Support a Smooth Transition Away From LIBOR by End 2021, The Financial Stability Board (FSB)

• FSB has today published a set of documents to support a smooth transition away from LIBOR by the end of 2021.

The ARRC Held the Third and Fourth Events in its Series of Webinars, The SOFR Symposium: The Final Year, on June 8 and July 21, ARRC

• The events built on the ARRC’s first and second events in the SOFR Symposium series, by covering the transition from LIBOR to SOFR in the derivatives market and the conditions necessary for a formal recommendation of forward-looking SOFR term rates.

Market Details

The FCA and the Bank of England Encourage Market Participants in a Switch to RFRs in the LIBOR Cross-Currency Swaps Market From 21 September, Bank of England

• Following close engagement with authorities across LIBOR jurisdictions and with market participants, the FCA and Bank of England support and encourage liquidity providers in the LIBOR cross-currency swaps market to adopt new quoting conventions for interdealer trading based on risk-free rates (RFRs) instead of LIBOR from September, 21 this year.

Active Transition of Legacy GBP LIBOR Loan Contracts – Timelines and Considerations for Borrowers, The Working Group on Sterling Risk-Free Reference Rates

• The Working Group on Sterling Risk-Free Reference Rates published a paper to help borrowers accomplish the recommended Q3 milestones to successfully transition legacy GBP LIBOR loans by the end of 2021.

ARRC Endorses MRAC Recommendations for September 21 “RFR First” Move of Interdealer Cross-Currency Swap Market Trading Conventions, ARRC

• ARRC has endorsed the Commodity Futures Trading Commission Market Risk Advisory Committee (MRAC) recommendation that interdealer trading conventions for cross-currency basis swaps between U.S. dollar, Japanese yen, sterling, and Swiss franc LIBOR move to each currency’s risk-free rate (RFR) as of September 21, 2021.

Regulatory Updates

CFTC’s Interest Rate Benchmark Reform Subcommittee Recommends July 26 for Transitioning Interdealer Swap Market Trading Conventions From LIBOR to SOFR, CFTC

• The CFTC’s Market Risk Advisory Committee’s (MRAC) Interest Rate Benchmark Reform Subcommittee voted to recommend a market best practice for switching interdealer trading conventions from LIBOR to the Secured Overnight Financing Rate (SOFR) for USD linear interest rate swaps.
• CME Group released several updates including:
  • There was a record SOFR futures and options average daily volume (ADV) of 127K, an increase of more than 200%, in June 2021, CME Group
  • As of June 30, 2021, the SOFR futures market has 550 participants, YTD ADV of 114K contracts (+154% YoY), and open interest of over 841K contracts (+87% YoY), CME Group

Understanding IBOR Benchmark Fallbacks, Brattle

• A team of consultants from The Brattle Group worked with the International Swaps and Derivatives Association (ISDA) and its counsel to prepare a series of reports following associated ISDA consultations of IBOR benchmark fallback rates.

DBS, StanChart Execute First SORA Interbank Option Trade, Regulation Asia

• DBS and Standard Chartered executed the first interbank option trade referencing the Singapore Overnight Rate Average (SORA). DBS and Bunge also executed Singapore’s first SOFR export financing transaction.