Recent developments, regulatory and market body announcements
Since our last article, there has been a raft of regulatory and market body announcements relating to the transition away from LIBOR and the following are those we consider most relevant. Please refer to the glossary at the end to navigate the many acronyms and terms of art which necessarily feature in any discussion of this issue.
As we previously reported, IBA were consulting on the future of USD LIBOR with a view to it continuing until the end of June 2023. On 5 March 2021, the FCA confirmed that this would be the case except for the quoted tenors for one week and two months which will cease to be published at the end of 2021. The remaining tenors will continue to be published at least until the end of June 2023 with the FCA considering whether to require IBA to publish a synthetic form of one-month, three-month and six-month USD LIBOR settings for a further period after that date to assist with Tough Legacy Contracts. However, new use of any synthetic LIBOR by UK-regulated firms in regulated financial instruments will be prohibited and continued use by regulated firms in legacy financial instruments will also be subject to FCA restrictions.
In the United States, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have issued supervisory guidance encouraging banks to “cease entering into new contracts that use US Dollar LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021”.
However, the ARRC has confirmed that it will not be able to recommend a SOFR Term Rate by mid-2021 and has encouraged market participants to continue to transition from LIBOR using the tools available now (such as SOFR Averages and Index Data that can be applied in advance or in arrears) rather than wait for a forward-looking term rate for new contracts. As a SOFR Term Rate is the first option in the ARRC Hardwired Fallback Language, this is clearly something the loan market has been hoping for. However, in the UK, regulators are not keen on reliance on forward-looking term rates as they are seen as more vulnerable to manipulation. Notwithstanding its announcement, the most recent version of the ARRC Hardwired Fallback Language still refers to the SOFR Term Rate as the initial fallback.