A PRACTICAL GUIDE TO LIBOR TRANSITION
A PRACTICAL GUIDE TOLIBOR TRANSITIONProduced for the Association of Corporate Treasurersby Slaughter and May
This is an interactive document.You can navigate with the icons on the right.The contents menu below is also interactive.CONTENTS1Introduction1.11.2LIBOR transition is imminentAims and scope of this guide35.935.10 RFR-linked bilaterals3745.11 US dollar loans38Rate switch loans – discussion points365.12 Euro loans395.13 Legacy LIBOR loans40Derivatives422A Treasurer’s LIBOR transition checklist53LIBOR transition timeline64LIBOR transition essentials76.1UK RFRWG recommendations for sterling derivatives424.1Role of the Working Groups76.2ISDA documentation for LIBOR transition434.2Cross-currency co-ordination86.3Current options for derivatives users444.3Risk-free rates96.4Non-LIBOR-linked derivatives444.4Term rates106.5ISDA Fallbacks Supplement454.5Other alternatives126.6Bespoke fallback provisions476.7LIBOR-linked derivatives prior to the Supplement Effective Date48564.6Compounded RFRs – rate conventions144.7Compounded RFRs – data sources166.8Legacy LIBOR derivatives484.8Managing legacy contracts176.9ISDA Fallbacks Protocol494.9“Tough legacy” contracts197Bonds507.150Loans215.1UK RFRWG recommendations for sterling loans217.2LIBOR transition in the international bond markets505.2Non-LIBOR-linked loans227.3RFR bond market conventions505.3LIBOR loans including “pre-agreed conversion terms”237.4Fallbacks in IBOR referencing bonds515.4LIBOR loans including an “agreed process for negotiation”247.5Legacy LIBOR bonds525.5LMA documentation referencing RFRs255.6RFR loans – key points for borrowers275.7RFR loans – calculation conventions5.8RFR loans - other issuesA practical guide to LIBOR transitionUK RFRWG recommendations for sterling bonds8Non-financial contracts53289Further information543310 Key contacts572
1. INTRODUCTION1.1 LIBOR transition is imminentMost treasurers will be aware that the availabilityof LIBOR cannot be relied on beyond the end of2021 and that LIBOR rates will be replaced, inmost instances, by risk-free rates (RFRs). RFRs areavailable in all five LIBOR currencies (as wellas a number of others), but relatively fewbusinesses have taken steps towards using them.This will change in the very near future.required to facilitate transition from LIBOR,as far in advance of the end of 2021 as possible.International authorities, national regulatorsand industry working groups are stepping uptheir efforts to raise awareness of the work thatremains and the need for businesses to have plansin place. To use their phrase, the time has come to“turbo-charge” LIBOR transition plans.Determining how RFRs and other alternativesto LIBOR can be adopted and used in financialproducts has been an enormous challenge forall market participants. Replacing LIBOR involvesthe unravelling of market conventions that havebeen used for more than thirty years, in favourof a range of new product-specific and currencyspecific conventions. As the final touches are putto the conventions and documentation that willenable the financial markets to dispense withLIBOR on a widespread basis, the focus has shiftedto implementation.This is particularly apparent in the UK loanmarket. The Working Group for Sterling RiskFree Rates (UK RFRWG) recommended in Aprilthat from the end of Q3 2020, all new sterlingLIBOR-referencing loans should contain provisionsthat enable the replacement of LIBOR with RFRs.Sterling LIBOR referencing loans must be phasedout altogether by the end of Q1 2021. Thesetargets require businesses raising new debt orrefinancing to engage with alternatives to LIBORsomewhat earlier than they might have anticipated.The scale of the task facing the financial sector(especially in light of COVID-related delays)requires the implementation of the adjustmentsto systems, infrastructure and documentationA practical guide to LIBOR transition3
1.2 Aims and scope of this guideMuch of the information on LIBOR transition is detailed, technicaland not available from a single source. The aim of this guide is toprovide a starting point for finance and treasury teams transitioningLIBOR-referencing financial products to alternative rates.The guide contains an overview of the key issues for users of loans,derivatives and other products - replacement rate options, calculationconventions and market documentation - alongside links to sourcesof further information. It also aims to give a practical steer on howtreasurers might approach some of the open issues that will need tobe determined on a case-by-case basis. It is structured as follows: Section 2 is a checklist of action points for treasurers Section 3 contains a timeline highlighting the key milestones tobe aware of between now and the end of 2021 Section 4 summarises “LIBOR transition essentials” – backgroundinformation about the LIBOR transition project, alternative ratesand key concepts Sections 5-8 outline the approach to replacement rates anddocumentation for loans (Section 5), derivatives (Section 6),bonds (Section 7) and non-financial products (Section 8) andsome of the key discussion points Section 9 contains links to further information and resourcesand Section 10, key contacts at the Association of CorporateTreasurers (ACT) and Slaughter and May.A practical guide to LIBOR transitionThe guide highlights the solutions that have developed for certainLIBOR products from a legal and documentation perspective.Treasurers will also need to consider broader operational issuesrelating to LIBOR transition; the updating of systems and marketinfrastructure to accommodate replacement rates as well asthe accounting and tax implications of a move from LIBOR toalternative rates.We are conscious that businesses operate cross-border in multiplecurrencies. The discussion in this guide is not limited to sterlingproducts. Its main focus is rather on English law, which is frequentlyused as the governing law of cross-border products involving multiplecurrencies. Treasurers should be aware that products governed bythe laws of other jurisdictions (for example, New York) may takea slightly different approach to replacement rates, conventions andrelated drafting. The guide touches on some of the key differencesin the context of cash products and the approach to “tough legacy”contracts, but local advice is likely to be required.While the bulk of the commentary in this guide relates to financialcontracts, many readers will be aware that LIBOR is also used in arange of non-financial contracts. Experience with LIBOR transitionin a financial context may mean that finance and treasury teamsalso have a role to play in raising awareness of the need to considerLIBOR usage, and how to manage transition, across their organisation.Possible approaches to replacing LIBOR references in non-financialcontracts are discussed in Section 8.Slaughter and May30 September 20204
2. A TREASURER’S LIBOR TRANSITION CHECKLISTI dentify outstanding LIBOR exposures: Review existing contracts(financial and non-financial) to determine the extent of outstandingLIBOR exposures. Assess the number of counterparties involved, theamount and currency of the exposure, the maturity of such exposuresand any fallback provisions. Consider hedging and linkages betweenproducts. Review provisions specifying the process for amendment,if any. Understand alternative rates: Familiarise yourself with RFRs(as well as other alternative rates), how they differ fromLIBOR and calculation conventions.Monitor market developments: Monitor how relevant product markets, jurisdictions and other corporates are approaching LIBORtransition. Draw on information/guidance from industry bodies,trade associations and your advisers.Create a project plan and timeline: Consider what steps you and your counterparty need to take to be ready and able, operationally andotherwise, to transition away from LIBOR. Form a view on the extentto which active transition (in advance of cessation) is feasible and if so,when it should take place.Consider systems/infrastructure updates: Consider the updates required to your treasury management system (TMS) to accommodatealternative rates. Proactively engage with your TMS provider tounderstand what it is doing to accommodate alternative rates andexpected timeframes for, and costs of, implementation.Consideraccounting/tax implications: Understand the tax and accounting implications of LIBOR transition. Engage with your taxadvisers/accountants where necessary. Engage with counterparties: Proactively engage with lenders andother counterparties to better understand their transition plans, theirpost-LIBOR product offering and what this means for your business.Engage internally: Implement a communication/education strategy for internal stakeholders (including business leadership) to increaseunderstanding/awareness where relevant throughout the business.A practical guide to LIBOR transition5
3. LIBOR TRANSITION TIMELINECurrencyOctober 2020: Expectedpublication of ISDASupplement and ProtocolGBPEnd Q3 2020: Lenders to offer non‑LIBORalternatives from end Q3 2020After end Q3 2020: all new and refinancedGBP LIBOR-linked loans to include clearcontractual arrangements to facilitateconversion to SONIA or other alternativesBy end 2020: SONIAterm reference rateanticipated to be availableQ3 2020USDEURA practical guide to LIBOR transitionEnd 2021: End of FCAsupport for LIBOR(assumed cessation)End 2020 / Early 2021: ISDASupplement and Protocol to becomeeffective (3-4 months after publication)Q4 2020Q1 2021From end Q3 2020:new syndicated loansto include hardwiredfallback languageAfter end 2020:issuance of USDLIBOR-linked FRNsmaturing after 2021to ceaseEnd Q1 2021: New issuance of GBP LIBOR‑linked linear derivatives andcash products maturing after 2021 to cease Acceleration of active conversion of cash productswhere viableQ2/3 2021: New issuance of GBP LIBOR‑linked non-linear and crosscurrency derivatives maturing after 2021 to cease Active conversion of LIBOR-linked linear derivativeswhere viable Completion of active conversion of cash productswhere viableQ2 2021Early 2021: Finalrecommendations for fallbacksfrom EURIBOR expectedQ3 2021Q4 2021Q1 2022After end Q2 2021: issuance of USD LIBOR-linked loans maturing after 2021 to cease SOFR term reference rate should be available issuance of new USD LIBOR derivatives to cease3 January 2022:EONIA to bediscontinued6
4. LIBOR TRANSITION ESSENTIALS4.1 Role of the Working GroupsThe official sector has encouraged an industry-led approach to LIBORtransition. The Financial Stability Board (FSB) recommended in 2014that the focus should be on RFRs as alternatives to LIBOR. Followingthat recommendation, national regulators convened Working Groupsin each LIBOR currency (the Working Groups) to catalyse market-ledtransition from LIBOR. These Working Groups are made up of banks,financial institutions, trade associations, advisers and other marketparticipants, including a number of treasurers.The Working Groups have taken the lead in recommendingreplacement rates and related calculation conventions for a range ofproducts in the relevant currency. Each main Working Group has anetwork of sub-committees and task forces made up of specialists witha remit to focus on particular products or particular aspects of thetransition project (such as systems and infrastructure). The diagramillustrates the structure of the UK RFRWG by way of example.A practical guide to LIBOR transitionUK RFRWGSenior AdvisoryGroupWorking Group onSterling RFRsSUB-GROUPSLoansBondsPension fundsand InsurersInfrastructureTerm SONIAreference rateOutreach andCommsTASK FORCESRegulatoryDependenciesLegalTerm Rate UseCaseAccountingTreatmentTough LegacyLoan EnablersCash MarketsLegacyNon-linearlegacyderivatives7
The ACT is a member of the UK RFRWG and also sits on a number of thesub-committees. The ACT and other trade associations have been heavilyinvolved in outreach and education projects relating to LIBOR transition.Their websites are an important source of information on this project. Someof the key resources are listed in Section 9.The Working Groups do not have regulatory powers. Their recommendationswith regard to replacement rates, conventions and timelines are, however,expected to guide market practice to a large extent. This is partly becausetheir recommendations are the result of consultation, but also because globaland national financial sector regulators have emphasised their support formarket-led transition efforts. The Bank of England and the Financial ConductAuthority (FCA), for example, have made clear to regulated firms that theyexpect them to adhere to industry and working group transition targets. TheFCA has also stated that firms are more likely to be able to demonstrate thatthey have complied with their regulatory obligations to treat customers fairlyin this context if they adopt solutions recognised by relevant working groups.It is important that treasurers are aware of the Working Group and otherindustry recommendations that are relevant to the floating rate productsused in their business and the timeframes to which they should be working.The Working Groups have set slightly different interim milestones on thepath to end 2021. The key dates to be aware of in relation to sterling, euroand US dollars are set out in the timeline in Section 3.A practical guide to LIBOR transition4.2 Cross-currency co-ordinationThe impetus to improve the robustness of interest rate benchmarks such asLIBOR is co-ordinated on a global level by the FSB, at the instigation of theG20. The FSB’s communications emphasise the need for cross-jurisdictionalco-operation, but acknowledge that complete homogeneity in terms of theapproach to replacement rates will not be possible in a multi-rate environment.National Working Groups are making efforts to co-ordinate their approachto LIBOR transition across products and currencies. The desire for therecommendations of each Working Group on LIBOR replacements forparticular products to take a consistent approach is a continuing feature ofconsultation feedback. Some issues have been ironed out. However, the factthat a benchmark with a single consistent methodology is being replaced witha menu of single currency rates with differing characteristics will inevitablyresult in some level of variation.This steepens the learning curve somewhat for users of multiple currencies,who will need to understand the approach taken to each currency. This iswhy multi-currency loans, going forward will require the rate sources andconventions applicable to each relevant reference rate to be documentedindividually. The international nature of the financial markets also meansthat there may be variations between the approach to rates and calculationconventions for certain currencies in domestic and cross-border deals.Cross-currency variations are discussed further in Section 5 (Loans),Section 6 (Derivatives) and Section 7 (Bonds).8
4.3 Risk-free ratesThere are different options to replace LIBOR, but in most instances,the alternative will be a RFR or a rate derived from a RFR.Some RFRs, like SONIA (the sterling RFR), are well-established ratesthat have been reformed more recently. Others, such as SOFR (the US dollarRFR) and STR (the euro RFR), are brand new. Their common characteristicis that they are all backward-looking overnight rates on a pool of virtuallyrisk-free investments. Otherwise, they have differing characteristics that reflecttheir underlying local market.The RFRs are therefore quite different from LIBOR. LIBOR includes a measureof bank credit risk and as a term rate available over a range of maturities, a termliquidity premium. It is calculated on a consistent basis across all five currencies.None of these elements are present in the RFRs.LIBOR vs. RFRsEconomicsMaturitiesConsistencyLIBOR includesbank credit riskLIBOR is aforward lookingterm rateLIBORmethodology isconsistent acrosscurrenciesRFRs(by definition)are risk freeRFRs arebackward lookingo/n ratesRFRmethodologies arenot harmonisedThe RFR for each LIBOR currency is set out in the table on the next page,together with the current IBOR options, details of the national working groupand links to sources of further information on the composition and operationof the relevant rate.A practical guide to LIBOR transition9
RISK FREE ratorWorkingGroupLIBORIBASterling OvernightIndex Average (SONIA)Bank of EnglandWorking Group on SterlingRisk-free Reference RatesLIBORIBASecured OvernightFinancing Rate (SOFR)Federal Reserve Bankof New York (NY FED)Alternative ReferenceRates Committee (ARRC)LIBORIBAEuro Short-termRate ( STR)European Central Bank (ECB)Working Groupon Euro Risk-free RatesLIBORIBASwiss Average RateOvernight (SARON)SIX Swiss ExchangeNational Working Group (NWG)on Swiss Franc Reference RatesLIBORIBATokyo OvernightAverage Rate (TONAR)Bank of JapanCross-industry Committeeon Japanese Yen InterestRate BenchmarksEURIBOREMMITIBOREuroyen TIBORJBATAA practical guide to LIBOR transition10
4.4 Term ratesFocus on backward-looking ratesMoving cash products from LIBOR, a forward-looking term rate available overa range of maturities, to a backward-looking RFR prompted much concernin the early stages of the transition project. To calculate a RFR over a period(for example in the context of a loan or bond), it is necessary to calculateinterest daily, meaning the results of the calculation will not be known untilthe end of the interest period. Corporates were concerned about the impactof using a backward-looking rate on their ability to manage cash effectivelyand there was a strong desire for forward-looking term RFRs.The priority of the Working Groups has, however, been to promote theuse of compounded (or averaged) RFRs, to align the cash markets with thederivatives market. SONIA compounded in arrears, for example, has beenused in the sterling overnight interest rate swap (OIS) market for over 20years, so conventions are well established. The slower transition to RFRs inthe loan market reflects the time it has taken to overcome the operationalhurdles to using backward-looking rates in the context of a product builtaround LIBOR.The UK RFRWG has repeatedly emphasised their expectation that the bulkof the cash markets should transition to backward-looking RFRs and shouldnot wait for term rates. The report of the UK RFRWG Use Case Task Forceconcluded:A practical guide to LIBOR transition“overnight SONIA, compounded in arrears, will and should become the norm in mostderivatives, bonds, and bilateral and syndicated loan markets given the benefits ofthe consistent use of benchmarks across markets and the robust nature of overnightSONIA. The future use of a forward-looking term rate in cash markets should bemore limited than the current use of LIBOR. So, where possible, counterparties areencouraged to transition to overnight SONIA compounded in arrears.”Forward-looking term ratesThe UK RFRWG believes term SONIA is likely to be appropriate only in limitedinstances where operational necessity precludes the use of a compounded inarrears RFR or another alternative rate. Transactions for smaller corporate,wealth and retail clients for whom simplicity and/or payment certainty is akey factor are an example. In addition, there are some products where theuse of SONIA compounded in arrears will likely create operational difficultyregardless of the sophistication of the borrower. These include trade andworking capital products such as supply chain finance and receivable facilities,export finance and emerging market loans, and Islamic facilities. In suchcases, although fixed rates or the Bank of England’s Bank Rate are likely to bepreferred, there may be instances where a forward-looking term rate is themost appropriate alternative to LIBOR.A Term SONIA Reference Rate (TSRR) is being developed for this limiteduse case. The TSRR is available i
A practical guide to LIBOR transition 4 1.2 Aims and scope of this guide Much of the information on LIBOR transition is detailed, technical and not available from a single source. The aim of this guide is to provide a starting point for finance and treasury teams transitioning LIBOR-referencing financial products to alternative rates.
to submit quotes for LIBOR, making clear that reliance on LIBOR could no longer be assured beyond this date. LIBOR is a benchmark which is regulated and administered in the UK but used globally. Any discontinuation of LIBOR will therefore have a global impact. What now? 2018 has seen regula
their respective OTC derivatives clearing and trading obligations to reflect the planned transition from LIBOR to risk-free rates. While many LIBOR settings will cease to be published after 31 December 2021, some GBP, JPY and USD LIBOR settings will continue to be published for a period (in the case of the GBP and
1 LIBOR transition Significant steps have been taken by financial market participants and regulators since 2012 to strengthen the governance, transparency and reliability of LIBOR benchmarks. However, as set out in the Financial Stability Board's (FSB) 2014 report 1, and subsequently reiterated by
reference FHA documents for additional information. This Reference Guide will also be revised as information is updated and changes are made. This Reference Guide is intended to provide a consolidated source of information for voluntary use by impacted stakeholders in preparing for the LIBOR transition. This Reference Guide is not
The LIBOR-Based Private Student Loan Transition Resource Guide (Resource Guide) may be updated periodically as new . The Alternative Reference Rates Committee is a group of private-market participants convened by the Federal Reserve . Association of Insurance Commissioners (NAIC). For more information, visit the ARR's website at: https .
convened the ARRC in 2014 to develop best practice recommendations in identifying potential alternative reference rates for USD LIBOR and for ensuring contract robustness in transactions relying on LIBOR, and to create an implementation plan to support the voluntary adoption of its recommended In June rate.
such as derivatives, loans, oating rate notes (FRNs), repos and securitized products will have to undergo signi cant system level changes. In our view, ef cient and timely LIBOR transition will require business impact assessment and adoption of digital technologies along with regulator
American Revolution: Events Leading to War To view this PDF as a projectable presentation, save the file, click “View” in the top menu bar of the file, and select “Full Screen Mode To request an editable PPT version of this presentation, send a request to CarolinaK12@unc.edu. 1660: The Navigation Acts British Action: – Designed to keep trade in England and support mercantilism .
