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London Inter-Bank Offered Rate (LIBOR) Reform 

August, 2020 -

(a) ARRC’s best practice for completing LIBOR transition

In May 2020, the Alternative Reference Rates Committee (ARRC), the industry group formed in 2014 to lead the LIBOR transition in the United States, published a set of recommended best practices (“Best Practices”) to help market participants to prepare for the discontinuation of LIBOR by the end of 2021.

The Best Practices recommended timelines and milestones for completing the LIBOR transition before the scheduled cessation date. Some key takeaways include:

  • new USD LIBOR cash products not utilised should include ARRC-recommended fallback language as soon as possible;
  • relevant third-party technology and operations vendors should complete all necessary enhancements by the end of 2020 to support the use of the Secured Overnight Financing Rate (SOFR) (being the ARRC’s recommended replacement rate for USD LIBOR);
  • new use of USD LIBOR should stop, though the specific timelines and recommendations for each cash product market (including floating rate notes, business loans, consumer loans, securitisations and derivatives) may vary; and
  • where contracts specified a party to select a replacement rate following a LIBOR transition event, the determining party should disclose its planned selection at least 6 months in advance of the effective replacement date.

Although the Best Practices mainly target the USD LIBOR market, market participants currently using non-USD LIBOR should also take note of them alongside other market development / transition guides issued by different leading industry groups from time to time. The full set of Best Practices can be found here.

(b) AFME white paper on client communications during LIBOR transition

In June 2020, the Association for Financial Markets in Europe (AFME) published a white paper (“Paper”) on managing conduct and compliance risks associated with client communications during the LIBOR transition.

The Paper highlights the need to develop a flexible client communications strategy and focuses on 5 key areas:

(i)

establishing a client communications strategy; the strategy should align with the firm’s existing LIBOR transition programme and market conventions / developments;

(ii)

content of client communications – e.g. clients should be appropriately informed of the LIBOR transition in a manner that is clear, fair and not misleading;

(iii)

methods and timing of client communications – e.g. firms should use different communication channels for different types of clients and consider the right timing for communication, taking into account evolving market developments;

(iv)

training and internal communications – e.g. firms should conduct additional training to ensure front line staff have adequate and competent knowledge of the implications of LIBOR discontinuation; and

(v)

monitoring and record keeping – e.g. firms should consider whether their current record keeping method need enhancing for LIBOR transition purposes.

The Paper notes that a single, one-size-fits-all client engagement strategy will not be sufficient to manage LIBOR transition risks. Client engagements will vary according to type of business and client, differing technical options for implementing the LIBOR transition, the role the firm plays in a transaction, the scope of services for which it is responsible, etc. Firms should communicate with clients adequately and in good time to allow sufficient time for consideration of all available options and implementation actions before the LIBOR cessation date, scheduled on 31 December 2021.

The paper is the second in a series that considers the management of conduct risks by firms during the LIBOR transition. The full paper can be accessed here. AFME’s first paper on the LIBOR transition, which contained guidance on effective compliance governance framework, was published in December 2019. Click here for the full report of the first paper.

(a) ASIFMA paper on IBOR transition in Asia

In July 2020, the Asia Securities Industry and Financial Markets Association (ASIFMA), Asia Pacific Loan Market Association (APLMA), International Swaps and Derivatives Association (ISDA) and the International Capital Market Association (ICMA) jointly published the IBOR Transition Guide for Asia (“Guide”), aiming to provide an overview to financial institutions (“FIs”) of the key implementation issues associated with LIBOR discontinuation. The Guide sets out a practical implementation checklist of key steps for FIs to follow during the transition:

(i)

program governance – appointing senior executives to oversee the IBOR transition program and establish an internal working group responsible for the transition;

(ii)

transition management program – conducting impact assessment and identifying resources and time needed for the transition;

(iii)

communication strategy – developing a communication strategy and materials to convey clear messages on the transition to internal and external parties;

(iv)

identify and validate exposures – conducting a product exposure analysis to identify all IBOR-linked products;

(v)

develop product strategy – reducing exposure to IBOR-linked products and offering new ARR-linked products;

(vi)

risk management – identifying key risks resulting from IBOR discontinuation and mitigating those risks;

(vii)

transition of existing contracts and new contracts – identifying all IBOR related contracts that mature beyond 2021 and preparing to incorporate appropriate fallback language; ensuring new contracts contain adequate fallback language to cater for IBOR discontinuation; renegotiating or terminating existing contracts as appropriate;

(viii)

operational and technology readiness – developing IT infrastructure and methodologies to cater for the transition;

(ix)

accounting and reporting – identifying impact on accounting and update financial disclosures as needed; and

(x)

taxation – identifying tax implications (e.g. changes to documentation or reporting requirements) and consider the jurisdictions affected.



The full Guide can be found in this link.

 



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