Financial Services Quarterly Report - Third Quarter 2018: A Break from the “B” Word – LIBOR and Benchmark Reform – Progress has the Wind in its Sails

by Dechert LLP
Contact

Dechert LLP

Six months have now passed since publication of the Dechert OnPoint, LIBOR – Where Are We Now?, and in that period progress on benchmark reform and the development of alternative risk-free-rates (RFRs) has gathered pace. At a time when much discussion is focussed on Brexit and what March 2019 will bring, LIBOR, benchmark reform and the alternative RFRs have never been far from the headlines.

The message remains that the market needs to be prepared, and there has been comment as to lack of preparedness from the buy-side. The fear that firms are not giving the topic enough attention is highlighted by the recently published “Dear CEO letters1”, jointly issued by the UK Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) to certain large banks and insurance companies regarding firms’ preparation for the transition from LIBOR to alternative RFRs.

The problem that must be solved is how to develop alternatives for the long-standing, widely used family of inter-bank offered rates (IBORs), considering that the estimated notional exposure to the IBORs across financial markets is approximately $370 trillion.

Key Developments

12 July 2018 International Action

On this single day, there were three key developments: the first, a new LIBOR and benchmark reform-related speech by Andrew Bailey2; the second, a statement by the Financial Stability Board (FSB) on reforms to interest rate benchmarks3; and the third, ISDA’s long-awaited launch of an industry-wide consultation on aspects of fall-backs for derivatives referencing certain benchmarks4. The common message from Andrew Bailey and the FSB was that although there has been progress, in the period ahead discussions must continue and the path towards transition cleared.

ISDA RFR Fall-Backs Consultation

The ultimate product of the July consultation and ISDA’s related work will be amendment of the 2006 ISDA Definitions to provide fall-backs for LIBOR and the family of IBORs5. Once finalised, the amendments are expected to be implemented in existing contracts by the now commonly used ISDA protocol mechanism. For new transactions entered into on or after the date the changes become effective, the amendments will automatically apply. The consultation, to which market participants generally are being encouraged to respond, is intended to solicit feedback on an approach to addressing certain technical issues with the adjustments required to the RFRs if the fall-backs are triggered.

The consultation sets out ISDA’s intended way of introducing fall-backs to the floating rate options currently set out at Section 7.1 of the 2006 ISDA Definitions. The amendments are structured so that an objective trigger event must first occur. The new fall-backs, which comprise those RFRs already identified globally (see below), will be activated on the occurrence of that trigger, but will take effect only once the discontinuation actually occurs. In practice, there could be a time lag between the trigger occurring (for example, a public announcement) and the discontinuation of the relevant rate. The consultation focuses on the adjustment methods to be applied to the new RFR fall-backs so that they are comparable to the IBORs they will replace. The adjustments are to account for term (the IBORs are term rates, whereas the new RFRs are overnight rates), and spread (the IBORs incorporate a credit spread, whereas the RFRs generally do not).

Although the high-profile USD LIBOR, EUR LIBOR and EURIBOR have not yet been included in the consultation, it is expected that these (together with HIBOR6) will be covered in supplemental consultations, and that the results of the current consultation will be used as a guide. Timing for USD LIBOR will depend on data being collected on SOFR (the replacement rate already identified). With respect to EUR LIBOR and EURIBOR, timing is subject to further progress being made on the replacement rate, identified only recently in September 2018. It is expected that, in due course, the results of the first consultation will be used as a guide for the fall-backs to these IBORs. Following the end of the consultation in October (recently extended to 22 October 2018), no significant substantive developments or the new supplements are expected until mid-2019.

Industry Action

While ISDA continues to be at the forefront of derivatives-related activity, other industry bodies have also been very active. In May 2018, the Loan Market Association (LMA) published recommended replacement screen rate language. This was followed on 20 September with a second edition of a joint paper by the LMA and the Association of Corporate Treasurers (ACT)7, which provides an overview of the future of LIBOR and highlights the wider impact of LIBOR transition beyond the derivative, bond and loan markets. The LMA also recently launched a LIBOR microsite. In June 2018 a group of industry bodies8 published an IBOR Global Benchmark Transition Report9, which aims to help market participants understand and engage with the ongoing efforts of global regulators and their various working groups. In the United States, on 24 September, the Alternative Reference Rates Committee released a consultation for USD LIBOR fall-back language for floating rate notes and syndicated business loans.

Interaction with the European Benchmark Regulation (BMR)

European work on fall-backs and alternative RFRs (including with respect to timing) continues to be driven by the requirements of the BMR. The key BMR requirement for benchmark providers is the authorisation of benchmarks, as well as additional requirements for “critical benchmarks”. The BMR requirements create additional time pressure for benchmark providers since, post-January 2020, it will no longer be possible to use certain benchmarks (including EURIBOR and EONIA) unless the benchmark administrator has been authorised or granted an exemption from authorisation. This leaves only just over a year to get ready for the new rules and, to avoid market disruption, there are calls for a delay so as to ensure all is in order. EMMI10 has already announced that it will not reform EONIA to meet the BMR requirements. 

For those benchmark users subject to the BMR, the key requirement of the BMR is to implement written plans regarding their “use of a benchmark” and to nominate alternatives should that benchmark materially change or cease to be provided.

On 19 September 2018, ISDA published the Benchmarks Supplement (Supplement). Although its primary intention is to serve those users of benchmarks that are subject to the “written plan” requirements of the BMR referenced above, given the global focus on contractual robustness, the Supplement may be used by parties not subject to the BMR who want to incorporate fall-back provisions in their contracts. The Supplement includes fall-backs as well as provisions regarding the consequences following a change to a benchmark for each of: the 2006 ISDA Definitions; the 2002 Equity Derivative Definitions; the 1998 FX and Currency Option Definitions; and the 2005 ISDA Commodity Definitions.

Global Progress on the Alternative RFRs

Global efforts to identify and develop replacement benchmarks continue. The most recent development was on 13 September 2018, when a European Central Bank (ECB) press release announced that the new euro risk-free rate would be the Euro Short-Term Rate (ESTER).

The table below summarises key information:

Region

Currency

Relevant
IBOR

Alternative
RFR

RFR Working Group

UK

£

GBP LIBOR

SONIA11

Working Group on Sterling Risk-Free Reference Rates

Euro Zone

EURIBOR/
EUR LIBOR

ESTER

Working Group on Euro-Risk Free Rates

Japan

¥

JPY LIBOR, JPY TIBOR

TONA12

Study Group on Risk-Free Reference Rates

Switzerland

CHF

CHF LIBOR

SARON13

National Working Group on Swiss Franc Reference Rates

United States

US $

USD LIBOR

SOFR14

Alternative Reference Rates Committee


What to do Now?

Given the wide IBOR exposure, firms are more than likely to be, or will be, affected by these developments in some way. It is important to:

  • Assess:
    • Current exposure to the LIBOR and IBORs;
    • If and when any such exposure will run-off; and
    • If and how any relevant agreements provide for the discontinuance of LIBOR.
  • Consider participating in market groups, especially if the firm has significant exposure.
  • Monitor developments.

Footnotes

1) These letters are available at https://www.fca.org.uk/news/statements/dear-ceo-libor-letter.

2) Interest rate benchmark reform: transition to a world without LIBOR, speech by Andrew Bailey, Chief Executive of the FCA, 12 July 2018.

3) FSB, Interest rate benchmark reform – overnight risk free rates and term rates.

4) Interbank Offered Rate (IBOR) Fallbacks for 2006 ISDA Definitions – Consultation on Certain Aspects of Fallbacks for Derivatives Referencing GBP LIBOR, CHF LIBOR, JPY LIBOR, TIOB, Euroyen TIBOR and BBSW .

5) These IBORs are: LIBOR in USD, GBP, JPY, CHF and EUR; EURIBOR; JPY TIBOR; Euroyen TIBOR; BBSW and HIBOR.

6) Hong Kong Interbank Offered Rate.

7) The future of LIBOR: what you need to know (second edition), 18 September 2018.

8) These industry bodies are: the International Swaps and Derivatives Association (ISDA); the Association of Financial Markets in Europe (AFME); the International Capital Market Association (ICMA); the Securities Industry and Financial Markets Association (SIFMA) and its asset management group (SIFMA AMG). The same group published the IBOR Global Benchmark Survey 2018 Transition Roadmap in February 2018.

9) The report is available at https://www.isda.org/a/OqrEE/IBOR-Transition-Report.pdf.

10) The European Money Markets Institute, the administrator of both EONIA and EURIBOR.

11) Sterling Overnight Index Average.

12) Tokyo Overnight Average Rate.

13) Swiss Average Rate Overnight.

14) Secured Overnight Financing Rate.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Dechert LLP | Attorney Advertising

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.