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Sponsored Blog: The LIBOR Transition: Fallback Rates and the USD Cash Market

By Jacob Rank-Broadley, Head of LIBOR Transition, B&I, Refinitiv.

Our latest Refinitiv webinar sees a panel of experts unpack some pertinent issues surrounding cash products referencing USD LIBOR after its cessation.

  1. The most widely used USD LIBOR settings will permanently cease or no longer be representative after 30 June 2023, the Financial Conduct Authority has announced
  2. Our panel at the Refinitiv webinar opens with a discussion around how the industry should handle legacy cash contracts and fallback language as this deadline for the cessation of LIBOR approaches.
  3. Refinitiv USD IBOR Cash Fallbacks are operational versions of ARRC’s recommended fallback language and will support the operational burden associated with implementing the fallback language.

On 5 March 2021, the Financial Conduct Authority (FCA) announced immediately after 31 December 2021, one-week and two-month USD LIBOR settings will permanently cease and immediately after 30 June 2023, the remaining USD LIBOR tenors will either cease publication or become no longer representative.

LIBOR will be replaced by alternative risk-free rates (RFRs) such as Secured Overnight Financing Rate (SOFR) in the USD market.

Industry challenges as USD LIBOR deadline approaches

Our panel opens with a discussion around some of the challenges facing the industry as the deadline for the cessation of USD LIBOR approaches.

A key focus area is tough legacy contracts that do not include suitable fallback language for once USD LIBOR ceases. The Alternative Reference Rates Committee (ARRC), which consists of private-market participants convened by the Federal Reserve Board and the New York Fed to help ensure a smooth transition away from USD LIBOR, has released recommended fallback language for use in cash products referencing USD LIBOR. ARRC’s recommended fallback language defines the circumstances under which references to USD LIBOR in a contract would be replaced with an alternative reference rate plus a benchmark spread adjustment – an adjustment intended to account for inherent differences between LIBOR and the replacement benchmark.

The State of New York has recently passed new legislation to aid a smooth LIBOR transition. For legacy contracts that contain only LIBOR-based fallback language or no fallback language at all, the legislation will strike out existing wording and instead replace it with the ARRC’s recommended fallback language. ARRC is supportive of federal relief along the lines of that passed in the State of New York.

The ARRC’s new fallback language, in conjunction with a recent State of New York law, should ensure that contracts function as intended after the cessation of LIBOR.

The panel also stresses that fallback language in consumer products differ from that of institutional products – the language used is generally much simpler and more straightforward – but overarching principles remain the same.

The publication of rates

Jacob Rank-Broadley, Head of LIBOR transition at Refinitiv, re-iterates that Refinitiv is striving to bring the hard work of ARRC and many market participants to life by delivering a practical element. Our published USD IBOR Cash Fallbacks are essentially operational versions of ARRC’s recommended fallback language and comprise three components: The replacement rate or adjusted SOFR rate (the average SOFR rate for any given tenor) The spread adjustment to compensate for differences between SOFR and LIBOR A final all-in number that can be used as a replacement rate

There will be two “flavours”, one for consumer products and one for institutional products. Rank-Broadley confirms that the Refinitiv rates will be available in prototype form imminently and in production form later in the year. They will be accessible on the Refinitiv website, and anyone subscribing to a Refinitiv product or service will be able to view real-time rates.

Furthermore, he stresses that other data carriers are encouraged to use the Refinitiv rates and that the hope is that these rates will be widely available and integrated into many firms’ solutions.

Additionally Refinitiv is working to ensure clear and concise communication that will help to smooth the consumer experience before and during the transition.

What shape will market adoption take?

The panel goes on to discuss market adoption and looks at the value that published rates provide over and above ARRC’s recommended fallback language, concluding that these rates are invaluable as they offer concrete assistance that will help to smooth the transition process.

By acting as stand-ins for LIBOR, these rates will go a long way towards minimising market disruption.

If these rates were not available, the firms that rely on them would bear far greater operational burden. Being able to access and pull in published rates directly from screens without manual intervention, on the other hand, reduces complexity and smooths operations.

The panel ends by offering some important final advice for those with existing USD LIBOR cash legacy products that mature after 30 June 2023:

The most straightforward course of action is to renegotiate and refinance contracts wherever possible, as this allows the flexibility to set the spread and not rely on fallbacks.

The panel also recommends starting the planning process early and whittling down any areas of uncertainty in terms of fallback position. As always, Refinitiv’s advice is that thorough and complete planning will help to smooth the LIBOR transition. We have also been developing a comprehensive range of benchmarks, data and analytics to support firms during the transition.

To learn more about Refinitiv LIBOR transition solutions.

  1. ICE LIBOR® and LIBOR® are registered trademarks of ICE Benchmark Administration Limited (IBA), and are used by Refinitiv with permission under licence by IBA.

Disclaimer

2021 © Refinitiv. All rights reserved. This is a prototype of the USD IBOR Cash Fallbacks (“Prototype Fallback Rates”) and is provided for informational purposes only. Refinitiv Limited, its affiliates (“Refinitiv”) and its third party providers (together “Refinitiv and Third Parties”) do not guarantee the quality, accuracy and/or completeness of the Prototype Fallback Rates or any data included therein.

Refinitiv and Third Parties make no express or implied warranties, representations or guarantees concerning the accuracy or completeness of the Prototype Fallback Rates or as to the results to be obtained by you, or any other person or entity from the use of the Prototype Fallback Rates or any data included therein. In no event shall Refinitiv and Third Parties have any liability for any loss of profits, special, punitive indirect, incidental or consequential relating to any use of the Prototype Fallback Rates.

No information provided, displayed or contained in the Prototype Fallback Rates is intended to be, or should be construed or used as, a benchmark, whether as a reference rate in financial instruments, or financial contract; or for valuation and pricing activities (“Prohibited Use”). Whether you have entered into a contract with Refinitiv or not, you are not permitted to access or use in any way such information for the Prohibited Use and may breach the Benchmark Regulation and/or any contract with Refinitiv if you do. Refinitiv does not warrant that the Prototype Fallback Rates are provided in accordance with the Benchmark Regulation. “Benchmark Regulation” means, in respect of the EEA, EU Regulation 2016/1011 and in respect of another country, the equivalent legislation. If you are in any doubt about the meaning of Prohibited Use or your obligations under the Benchmark Regulation, you should seek professional advice.

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USD ICE LIBOR, which is administered and published by ICE Benchmark Administration Limited (IBA), serves as an input for the Prototype Fallback Rates.

LIBOR®, ICE LIBOR® and ICE Benchmark Administration® are registered trade marks of IBA and/or its affiliates. USD ICE LIBOR , and the registered trade marks LIBOR, ICE LIBOR and ICE Benchmark Administration, are used by Refinitiv with permission under licence by IBA. The Prototype Fallback Rates are not sponsored, endorsed or provided by IBA or any of IBA’s affiliates. IBA and its affiliates make no claim, predication, warranty or representation whatsoever, express or implied, as to the results to be obtained from any use of LIBOR® or Prototype Fallback Rates, or the appropriateness or suitability of LIBOR® or the Prototype Fallback Rates for any particular purpose to which it might be put, including with respect to the Prototype Fallback Rates. To the fullest extent permitted by applicable law, all implied terms, conditions and warranties, including, without limitation, as to quality, merchantability, fitness for purpose, title or non-infringement, in relation to LIBOR® and Prototype Fallback Rates, are hereby excluded and none of IBA or any of its affiliates will be liable in contract or tort (including negligence), for breach of statutory duty or nuisance, for misrepresentation, or under antitrust laws or otherwise, in respect of any inaccuracies, errors, omissions, delays, failures, cessations or changes (material or otherwise) in LIBOR® or Prototype Fallback Rates, or for any damage, expense or other loss (whether direct or indirect) you may suffer arising out of or in connection with LIBOR® or Prototype Fallback Rates or any reliance you may place upon it.

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