LIBOR Transition Advisory Newsletter - February 2022

Welcome to our first newsletter of 2022 and our first edition published under our new name of Kroll (Duff & Phelps recently rebranded as Kroll). It is also the first in the post-LIBOR era.

The first impression of the cessation of the non-USD LIBOR at the end of 2021 was that it has been a smooth process, helped, no doubt, by the wider usage of the synthetic LIBOR curves now being published.  

However, as many commentators have observed, the work is not yet finished. There is still a large portfolio of products that needs to be reviewed and updated to utilize the new risk-free benchmarks.  Synthetic curves are not expected to be used indefinitely, so the regulators will be looking for tangible progress on the legacy portfolio. 

And while the revision of documentation is important, focus must also be put on updating the operational, risk and valuation processes and systems to ensure that the new curves and fallbacks are handled correctly.

While it was a smooth year-end, there is still a lot of work to be done.

LIBOR Highlights

General News

Year-End Progress Report: The Transition from U.S. Dollar LIBOR, ARRC

• The Alternative Reference Rates Committee (ARRC) released the “Year-End Progress Report: The Transition from U.S. Dollar LIBOR,” highlighting progress in the transition away from USD LIBOR. The report highlights the significant, positive momentum in the transition to Secured Overnight Financing Rate (SOFR) across cash and derivatives markets.

The World’s Most Important Number Is Done. The Work to Replace It Continues, Barron’s 

• Tom Wipf, Chairman of the ARRC and Vice Chairman of Institutional Securities at Morgan Stanley, authored a Barron’s opinion-editorial titled, “The World’s Most Important Number Is Done. The Work to Replace It Continues,” highlighting the significant, positive momentum in the transition away from USD LIBOR to SOFR and the key priorities that remain in the coming year

Facilitating the LIBOR Transition, CFPB

• The Consumer Financial Protection Bureau (CFPB) issued a final rule to facilitate the transition away from LIBOR for consumer financial products. The final rule will be effective as of April 1, 2022, by which all creditors must select alternative reference rates for existing LIBOR-linked consumer loans.

Critical Benchmarks (References and Administrators' Liability) Act 2021, UK Government 

• The UK Government passed the Critical Benchmarks (References and Administrators’ Liability) Act 2021 providing safe harbor provisions to support the wind-down of critical benchmarks.

CARR’s Review of CDOR: Analysis and Recommendations, Canadian Alternative Reference Rate Working Group 

• The Canadian Alternative Reference Rate (CARR) working group published a whitepaper analyzing and providing recommendations on the future of the Canadian Dollar Offered Rate (CDOR). In summary, CARR recommends (i) no new CDOR issuances after June 30, 2023 (with limited exceptions) and (ii) Refinitiv Benchmark Services (UK) Limited (RBSL), CDOR’s administrator, cease publication of CDOR after June 30, 2024.

H.R. 4616 Adjustable Interest Rate (LIBOR) Act of 2021 (Bill),  U.S. House of Representatives 

• The U.S. House of Representatives passed the H.R. 4616 Adjustable Interest Rate (LIBOR) Act of 2021 (Bill) to reduce risks associated with the transition away from USD LIBOR to help effect a fair transition for financial contracts that do not consider the permanent cessation of LIBOR and have no workable fallbacks.
  
  

Market Details

Guidance on the Transition From Interbank Offered Rates to Other Reference Rates, Treasury Department and Internal Revenue Service (IRS)

• The Treasury Department and Internal Revenue Service (IRS) issued final regulations providing guidance on the tax consequences of amendments to debt instruments and/or certain associated interest rate swaps or other derivative contracts to replace LIBOR.

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

• 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.

CME Group Reports 2021 Annual, Q4 and Monthly Market Statistics, CME Group

• The CME Group reported 2021 Annual, Q4 and Monthly Market Statistics, which included a record SOFR average daily volume of 277,464 contracts across asset classes, an increase of 301% in Q4 2021.

Derivatives Clearing Obligation – Introduction of Contracts Referencing TONA: Amendment to BTS 2015/2205, Bank of England 

• The Bank of England amended BTS 2015/2205 to include overnight index swaps (OIS) that reference the Tokyo Overnight Average Rate (TONAR), which will come into force on January 31, 2022. TONAR OIS contracts with an original maturity between seven days and 30 years will be subject to the derivatives clearing obligation under the European Market Infrastructure Regulation

Regulatory Updates

Guidelines on Methodology, Oversight Function and Record Keeping Under the Benchmarks Regulation, European Securities and Markets Authority 

• The European Securities and Markets Authority published official guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation, following its consultation in 2021. The guidelines, mainly pertaining to the competent authorities, will take effect on May 31, 2022.

LIBOR Transition Based on the Final Report on the Results of the Public Consultation on the Treatment of Tough Legacy Contracts in Japan published by the Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks, Financial Services Agency and Bank of Japan 

• The Financial Services Agency (FSA) and Bank of Japan (BOJ) released a statement on the use of synthetic yen LIBOR in response to the Final Report on the Results of the Public Consultation on the Treatment of Tough Legacy Contracts in Japan, published by the Cross-Industry Committee on Japanese Yen Interest Rate Benchmarks.

Leveraged Loan Borrowers Ditch LIBOR for SOFR with Add-On Deals, Bloomberg

• A handful of companies have side-stepped a grey area that would have allowed them to use LIBOR on U.S.-leveraged loan sales, another sign that the $1.3 trillion market is embracing the new regulator-approved Secured Overnight Financing benchmark.