LIBOR Transition Advisory Newsletter - December 2021

We now have less than one month to go before the cessation of non-USD LIBOR rates and the end of the use of any LIBOR in new transactions.  The decision by the FCA to allow all instruments, except cleared derivatives, to use the synthetic LIBOR in 2022 has relieved some of the pressure from the migration of the legacy portfolio.  The focus remains on operational readiness to transact in the new RFRs, the development of the markets underpinning them and the measures required to ensure that the tough legacy products are able to successfully transition.

This will be the final newsletter for this year, so we would like to wish everyone a happy holiday season and a prosperous 2022.  For next year we will continue to publish on a bimonthly basis as we continue to provide updates on news and events that will impact the transition.

General News 

Companies Cling to Libor as Key Deadline Nears, Wall Street Journal

• U.S. companies need to give up the London interbank offered rate for new debt at the end of December 2021. Many want to close just one more deal before that.

Statement of the Alternative Reference Rates Committee as the “Relevant Recommending Body” under State LIBOR Legislation with respect to 1-week and 2-month USD LIBOR tenors, ARRC

• A statement published by ARRC that constitutes the selection and recommendation by the ARRC of the recommended benchmark replacement, the recommended spread adjustment and certain benchmark replacement conforming changes with respect to any New York or Alabama law-governed contract, security or instrument:

(a) that references the 1-week and/or 2-month tenors of USD LIBOR; and

(b) to which the state LIBOR legislation applies as a result of the occurrence of a LIBOR replacement date

The LIBOR Transition: Protecting Consumers and Investors, U.S. Senate Committee on Banking, Housing and Urban Affairs

• The U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on the LIBOR transition, and protecting customers and investors. Witnesses agreed that federal legislation to address LIBOR transition issues for legacy contracts is needed to ensure a safe and effective solution for all 50 states and the District of Columbia.

Maintaining Momentum, ISDA

• The International Swaps and Derivatives Association’s (ISDA) IQ publication released a set of responses from a group of senior policy-makers and industry working group chairs regarding the key challenges that lie ahead as LIBOR is retired. The publication included responses from ARRC Chair Tom Wipf and Senior Vice President at the Federal Reserve Bank of New York, Nathaniel Wuerffel.

LIBOR Transition Does Not Pose Material Risk to CLOs, Fitch Ratings

• The transition away from LIBOR is not expected to result in rating changes to CLO notes, according to Fitch Ratings in its report: USD CLO LIBOR Transition Will Not Pose Material Risk to CLO Ratings.

Market Details 

CME Group Announces Record SOFR Futures Volume and Open Interest, CME Group

• CME Group reported record SOFR futures volume and open interest. SOFR futures contracts reached a record 396,421 contracts on October 18, 2021. SOFR futures open interest reached a record 1,166,016 contracts on October 19, 2021.

Financial Stability in Focus, Bank of England

• The Bank of England’s Financial Policy Committee published the Financial Stability in Focus report on the progress in using alternative reference rates. It emphasized the need to continue using robust alternative reference rates to minimize market disruption during the transition.

CFTC’s Interest Rate Benchmark Reform Subcommittee Selects November 8 for SOFR First for Non-Linear Derivatives, CFTC

• The Interest Rate Benchmark Reform Subcommittee, a subcommittee of the Commodity Futures Trading Commission’s Market Risk Advisory Committee (MRAC), voted to select November 8th as the date for switching interdealer trading conventions from LIBOR to the SOFR for USD non-linear derivatives under the MRAC’s SOFR First initiative.

Refinitiv Launches USD IBOR Institutional Cash Fallbacks in Production to Facilitate Industry Transition from USD LIBOR, Refinitiv

• On November 20, Refinitiv announced that USD IBOR Institutional Cash Fallbacks are now production benchmarks, and it will launch USD IBOR Consumer Cash Fallbacks 1-week and 2-month settings on January 3, 2022 – pending Refinitiv Benchmark Services (UK) Limited (“RBSL”) board approval.

Regulatory Updates 

FCA Confirms Rules for Legacy Use of Synthetic LIBOR Rates and No New Use of Us Dollar LIBOR, FCA

• The FCA has confirmed it will allow the temporary use of ‘synthetic’ sterling and yen LIBOR rates in all legacy LIBOR contracts, other than cleared derivatives, that have not been changed at or ahead of end-31 December 2021.

Tokyo Swap Rate, Refinitiv

• Refinitiv launched the regulated Tokyo Swap Rate for swaps referencing TONAR. Refinitiv is using the Tokyo Swap Rate with a constant spread adjustment to produce prototype Tokyo Swap Rate Fallback settings, with plans to produce a benchmark in 2022.

CFPB Issues Final Rule to Facilitate Transition From LIBOR, National Mortgage Professional

• The Consumer Financial Protection Bureau (CFPB) today finalized a rule facilitating the transition away from the LIBOR interest rate index for consumer financial products, including mortgages.
  The rule establishes requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans after April 1, 2022. Under the rule, no new financial contracts may reference LIBOR as the relevant index after the end of 2021. Starting in June 2023, LIBOR can no longer be used for existing financial contracts.