LIBOR Transition Advisory Newsletter - June 2021

There is a strong regulatory and legal flavor to this month's newsletter with a string of announcements, guidance and milestones.

There has been ongoing development in the risk-free rate (RFR) markets with more liquidity being reported and a move to use RFRs as the primary quotation rate for exchange traded derivatives and the USD interdealer swap market.

As we approach the end of the second quarter the milestones set by the UK working group for the cessation of new exchange traded and linear LIBOR based derivatives that expire beyond the December 31 deadline (with some limited exceptions) should provide another boost to RFR liquidity. The development of legislation in the U.S. and other jurisdictions supporting the transition, coupled with the continued release of guidance from regulators and industry bodies has helped remove the uncertainties for market participants. However, with half year looming in the not so distant future, the pressure is growing to make the transition happen.

LIBOR Highlights

General News

Preparing for the LIBOR Transition, a Due Diligence Insights Virtual Event hosted by Jennifer Press and Marcus Morton, from the Kroll team: Jennifer Press and Marcus Morton, IMDDA

• Jen Press and Marcus Morton discuss the upcoming transition away from LIBOR, including transition milestones, key regulatory updates and crucial next steps to consider in your preparations.

ARRC Announces the Third Event in its Series The SOFR Symposium: The Final Year, ARRC

• On June 8, 2021, ARRC conducted its third in a web series, The SOFR Symposium: The Final Tear. The event opened with remarks by CFTC Acting Chair Behnam, followed by a discussion featuring leadership from both the public and private sectors.

ARRC Identifies Market Indicators to Support a Recommendation of a Forward-Looking SOFR, ARRC

• On May 6, 2021, ARRC published a set of market indicators that it will consider recommending a forward-looking SOFR term rate.

ARRC Welcomes MRAC Subcommittee’s Recommended Dates for Transitioning Interdealer Swap Market Trading Conventions to SOFR, ARRC

• On June 6, 2021, the Interest Rate Benchmark Reform Subcommittee announced that it recommends, as a market best practice, that interdealer brokers change USD linear swap trading conventions from USD LIBOR to SOFR on July 26, 2021. The subcommittee also recommends keeping interdealer broker LIBOR linear swap screens available only for informational purposes after this date and turning the screens off altogether after October 22, 2021.

Market Details

Deep, Liquid, and Transparent (DLT) Assessment of the Sterling Overnight Index Average (SONIA) Overnight Index Swap (OIS) market - June 2021,  Bank of England

• The markets underpinning the SONIA benchmark continue to develop with liquidity now observed out to 50 years demonstrating the strong development of the RFR markets.

The FCA and the Bank of England encourage market participants in a switch to SONIA in the sterling exchange traded derivatives market from 17 June, Bank of England

• UK regulators are encouraging markets to make SONIA the primary quotation rate for exchange traded derivatives to bring the exchange market in line with the OTC market which made the transition earlier this year, a measure which should help to build liquidity in the SONIA markets.

Libor Replacements Multiply in Shift That Could Fracture Markets, Bloomberg

• A slew of newer and lesser-known reference rates are staking their claim to a share of the post-LIBOR landscape as the outlook for the space grows increasingly fractured.

Regulatory Updates

FCA Consults on Use of New Powers to Support Orderly Wind Down of Critical Benchmarks, FCA

• The FCA has published a consultation on its proposed policy framework for exercising two of its new powers under the Benchmarks Regulation (BMR), which will be introduced by the Financial Services Act 2021. These powers relate to the use of critical benchmarks that are being wound down.

LIBOR Transition: Laws Won't Eliminate All Uncertainty, S&P Global

• Policymakers in the U.S., the European Union and the UK are seeking legislative solutions to address uncertainties about the termination of LIBOR as a benchmark interest rate.

Aussie Regulators Urge Firms to Accelerate Switch from LIBOR, Finance Magnates

• Three Australian regulators, the Australian Securities and Exchange Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA), have requested market participants to transition away from their legacy contracts with LIBOR. In addition, they want the financial institutions to cease the use of the controversial benchmark in new contracts by the end of 2021.

Regulators Insist Derivatives Industry Must Ditch LIBOR, Reuters

• On June 2, 2021, global financial regulators urged firms to stop using LIBOR by the end of the year, and said derivatives markets linked to the tarnished interbank rate should switch to RFRs compiled by central banks.