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While certain panel-based US dollar settings are continuing until end-June, the market has already shifted new activity away from LIBOR and toward RFRs. Consistent with regulatory guidelines, we are no longer entering into new contracts referencing LIBOR.
The timeline of cessation for any remaining LIBORs is as follows.
In response to the planned cessation of USD LIBOR, financial regulators have strongly encouraged market participants not to delay the transition away from USD LIBOR as a reference rate and to act now, if they haven’t already, to remediate legacy LIBOR contracts.
In addition to LIBOR’s timeline of cessation, the following reference interest rates have specific end-dates as well:
Notwithstanding market-wide efforts to transition contracts away from LIBOR prior to its cessation as a representative rate, not all LIBOR contracts may have transitioned by 30 June. There is likely to be a limited pool of outstanding contracts (so-called ‘tough legacy’ contracts) that have no realistic prospect of being amended to transition away from US dollar LIBOR settings by end-June 2023.
Over the past year, supervisors and legislators have taken measures to limit the risk of widespread contractual challenge to such ‘tough legacy’ exposures.
In December, the Federal Reserve Board published regulation to implement previously adopted legislation, sometimes referred to as ‘the US LIBOR Act’. This Act establishes a process to move contracts governed by US law that contain no, or unworkable, fallbacks, to alternative rates when the US dollar LIBOR panel ends. The exact make-up of the replacement rate, which is SOFR based and includes an adjustment spread, varies per asset class. It is consistent with previously published guidance on fallback rates from the NY Fed’s Alternative Reference Rates Committee and ISDA.
In order to ensure an orderly wind-down of tough legacy contracts not governed by US law (and hence not covered by the LIBOR Act) the UK Financial Conduct authority (FCA) has proposed publishing 1-, 3-, and 6-month US dollar LIBOR settings in synthetic form, after June 30 2023. If adopted, synthetic LIBOR is expected to be published until the end of September 2024. Under the FCA proposals, synthetic US dollar LIBOR would be the sum of the CME Term SOFR Reference Rate plus the International Swaps and Derivatives Association (ISDA) fixed spread adjustment for the corresponding LIBOR setting.
The FCA has made it clear that while in their view synthetic LIBOR settings are a fair and reasonable approximation of what LIBOR might have been had it continued to exist, they are not based on panel-bank submissions of estimated borrowing costs and hence not representative of the markets that the original LIBOR settings were intended to measure.
This means that under the Benchmark Regulation (‘BMR’) their use will be limited to a specifically prescribed subset of legacy contracts. Regulators have made it clear that the synthetic settings are not intended for use in contracts that would need to be amended to enable their use.
It also means that contracts that already include a trigger to LIBOR when it is no longer representative (in addition to LIBOR ceasing to be published) will fall back to the relevant RFR as expected. Such contracts include derivatives contracts where the ISDA IBOR Fall-backs Protocol provisions have been incorporated, either by adherence to the Protocol or because the derivative transaction was entered into on or after 25 January 2021.
We refer to the respective publications of the Federal Reserve and the FCA for additional details, including the exact calculation methods of the respective rates.
The impact of LIBOR cessation may not be the same for exposures across different asset classes, as industry conventions and legislative solutions differ between derivatives and loan markets. Therefore, relying on standard fall-back language or legislation to transition a loan hedged with a derivatives contract, may affect your cash-flows in unexpected ways.
We encourage you to review your remediation plans and to determine whether the LIBOR Act or possibility of synthetic USD LIBOR means adjustments are needed.
LIBOR is ceasing in a few months’ time. Supervisory bodies have made it clear that the possible publication of synthetic USD LIBOR is not a reason to delay the transition of contracts from USD LIBOR to SOFR.
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As nothing in this document should be taken to be advice, we encourage you to seek independent advice on these matters and you should reach your own conclusions and decisions, in consultation with your own advisors. The information in this document might change and we do not undertake to update it.
CME Term SOFR is a rate provided by CME Benchmark Administration Limited and is market data that is the property of CME Group. CME Group market data is used under license as a source of information for certain Commonwealth Bank of Australia products. CME Group has no other connection to Commonwealth Bank of Australia products and services and does not sponsor, endorse, recommend or promote any Commonwealth Bank of Australia products or services. CME Group has no obligation or liability in connection with the Commonwealth Bank of Australia products and services. CME Group does not guarantee the accuracy and/or the completeness of any market data licensed to Commonwealth Bank of Australia and shall not have any liability for any errors, omissions, or interruptions therein. There are no third party beneficiaries of any agreements or arrangements between CME Group and Commonwealth Bank of Australia.
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