LIBOR Transition Advisory Newsletter - July 2021

Only Six Months To Go

Now that the second quarter is over, the pressure to complete the transition away from LIBOR continues to build. Regulators on both sides of the Atlantic and across the globe have issued further guidance to help move the various parts of the LIBOR-using world onto the new risk-free rates and address the specific issues affecting particular products.

Other developments, such as the move away from LIBOR as the primary quotation rate for swaps and exchange traded derivatives, will help to drive liquidity in the underlying markets and build the robustness of the risk-free rates as replacing benchmarks.

The emphasis is also shifting to helping smaller firms who are still in the initial stages of their transition and this month Kroll has launched a toolkit to help identify LIBOR exposures – the first step on the way to a successful transition.

LIBOR Highlights

General News

LIBOR Transition Toolkit, from the Kroll team: Jennifer Press, Marcus Morton, Rich Vestuto, Mark Turner and Florian Nitschke

• Kroll, has published a LIBOR Exposure Assessment Toolkit including  a free-of-charge guide and template to assist gathering the appropriate documentation to assess your LIBOR-linked exposures, which includes on-balance sheet LIBOR-linked instruments and off-balance sheet exposures such as accounting considerations, valuation and risk models, third-party vendors, information technology and treasurer management systems. Please contact your Kroll representative located at the end of the LIBOR Exposure Assessment Toolkit to discuss any questions or proposed next steps regarding your LIBOR transition plan.

ARRC Welcomes FHFA Supervisory Letter on Transition Away From LIBOR, ARRC

• ARRC welcomes the supervisory letter published by the Federal Housing Finance Agency today to the Federal Home Loan Banks to support a smooth transition away from USD LIBOR. The letter encourages the continued use of SOFR and SOFR averages, and warns against the adoption of rates that have similar shortcomings as those associated with LIBOR.

ARRC Welcomes and Highlights Messages From Recent FSOC Principals Meeting, ARRC

• ARRC welcomes and highlights the key points made during the Financial Stability Oversight Council (FSOC) Principals Meeting on June 11 . Convened by Treasury Secretary Janet Yellen, the meeting included a discussion about the importance of accelerating the transition from LIBOR and using alternative reference rates such as the ARRC-recommended SOFR for derivatives and capital markets products. The full recording of the open session is available in the link above.

What Will the End of LIBOR Mean for the Multifamily Industry?, Affordable Housing Finance

• A synopsis summarizing how the multifamily housing industry is moving closer to phasing out its long-standing index for adjustable-rate loans and other financial transactions.

Market Details

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 SOFR for USD linear interest rate swaps.

European Banks’ LIBOR Tail Risks Subside, Fitch Ratings

• European banks’ tail risks associated with the transition from legacy LIBOR benchmarks are subsiding, Fitch Ratings says. The transition is benefitting from the efforts of authorities in the region to corral the industry to migrate to using new risk-free rates and amend legacy debt and derivative contracts to reflect replacement fallback rates.

Market Volatility May Rise on Absence of Clear LIBOR Alternative: Fitch, CFODive

• The planned sunsetting of the London Interbank Offered Rate (LIBOR) at the end of this year might disrupt financial markets because of the absence of a clear successor to the reference rate, Fitch Ratings said in a report

Business Loans ‘Especially Slow’ to Transition From LIBOR, Posing Risks: FSB, CFODive

• U.S. companies and banks have not moved fast enough in starting the switch from the LIBOR to a new reference rate, FSB said, warning of potential market turmoil with the approach of LIBOR’s scheduled by the end of 2021.

Regulatory Updates

LIBOR Transition in the Derivatives Market, FCA

• The FCA and Bank of England have worked with market participants to encourage the use of SONIA rather than LIBOR from a series of dates in specific products to develop the SONIA ecosystem and reduce the risk of cliff-edges on regulatory milestones.

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

• In June 2021, The Financial Stability Board (FSB) published a set of documents to support a smooth transition away from LIBOR by the end of 2021.

LIBOR – 6 Months to Go, FCA

• A keynote speech by Edwin Schooling Latter, Director of Markets and Wholesale Policy at the Financial Conduct Authority (FCA), delivered at UK Finance's Commercial Finance Week on July 5, 2021.